<PAGE> 1
File No. 33-
As filed with the Securities and Exchange Commission on February 15, 1996.
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-14
_____
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 /_X__/
____
Pre-Effective Amendment No. __ /____/
____
Post-Effective Amendment No. ___ /____/
(Check appropriate box or boxes)
JOHN HANCOCK TAX-FREE BOND FUND
-------------------------------------------------
(Exact name of registrant as specified in charter)
101 Huntington Avenue, Boston, Massachusetts 02199-7603
- --------------------------------------------------------------------------------
(Address of principal executive office) Zip Code
(617) 375-1700
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, including Area Code)
With a copy to:
---------------
Thomas H. Drohan, Esq. Jeffrey N. Carp, Esq.
John Hancock Advisers, Inc. Hale and Dorr
101 Huntington Avenue 60 State Street
Boston, MA 02199 Boston, MA 02109
- --------------------------------------------------------------------------------
(Name and address of agent for service)
Approximate Date of Proposed Public Offering: As soon as practicable
after the effectiveness of the registration statement.
No filing fee is required because an indefinite number of shares has
previously been registered pursuant to Rule 24f-2 under the Investment Company
Act of 1940, as amended. This Registration Statement relates to shares
previously registered on Form N-1A (File Nos. 33-32246 and 811-5968.
It is proposed that this filing will become effective on March 16, 1996
pursuant to Rule 488 under the Securities Act of 1933.
<PAGE> 2
<TABLE>
JOHN HANCOCK TAX-FREE BOND FUND
CROSS-REFERENCE SHEET
Items Required by Form N-14
---------------------------
PART A
- ------
<CAPTION>
Item No. Item Caption Prospectus Caption
- -------- ------------ ------------------
<S> <C> <C>
1. Beginning of Registration COVER PAGE OF REGISTRATION
Statement and Outside Front STATEMENT; FRONT COVER PAGE OF
Cover Page of Prospectus PROSPECTUS
2. Beginning and Outside Back TABLE OF CONTENTS
Cover Page of Prospectus
3. Synopsis and Risk Factors SUMMARY; RISK FACTORS AND SPECIAL
CONSIDERATIONS
4. Information About the SUMMARY; INFORMATION CONCERNING THE
Transaction MEETING; PROPOSAL TO APPROVE THE
AGREEMENT AND PLAN OF
REORGANIZATION; CAPITALIZATION
5. Information About the PROSPECTUS COVER PAGE: INTRODUCTION;
Registrant SUMMARY; BUSINESS OF TAX-FREE BOND
FUND
6. Information About the PROSPECTUS COVER PAGE: INTRODUCTION;
Company Being Acquired SUMMARY; BUSINESS OF TAX-EXEMPT
INCOME FUND
7. Voting Information PROSPECTUS COVER PAGE; NOTICE OF
SPECIAL MEETING OF SHAREHOLDERS;
SUMMARY; INFORMATION CONCERNING THE
MEETING
8. Interest of Certain Persons NONE
and Experts
9. Additional Information NOT APPLICABLE
Required for Reoffering by
Persons Deemed to be
Underwriters
</TABLE>
<PAGE> 3
<TABLE>
PART B
- ------
<CAPTION>
Caption in Statement of
Item No. Item Caption Additional Information
- -------- ------------ -----------------------
<S> <C> <C>
10. Cover Page COVER PAGE
11. Table of Contents TABLE OF CONTENTS
12. Additional Information ADDITIONAL INFORMATION ABOUT
About the Registrant TAX-FREE BOND FUND
13. Additional Information About ADDITIONAL INFORMATION ABOUT
the Company Being Acquired TAX-EXEMPT INCOME FUND
14. Financial Statements ADDITIONAL INFORMATION ABOUT TAX-
FREE BOND FUND; ADDITIONAL
INFORMATION ABOUT TAX-EXEMPT INCOME
FUND; PRO FORMA COMBINED FINANCIAL
STATEMENTS
PART C
- ------
Item No. Item Caption
- ------- ------------
15. Indemnification INDEMNIFICATION
16. Exhibits EXHIBITS
17. Undertakings UNDERTAKINGS
</TABLE>
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<PAGE> 4
JOHN HANCOCK FUNDS
A Global Investment Management Firm
101 Huntington Avenue
Boston, Massachusetts 02199-7603
March 22, 1996
TAX-EXEMPT INCOME FUND
Dear Fellow Shareholder:
As you may know, the John Hancock family of funds has expanded in size with the
addition of the former Transamerica Funds. This presents an opportunity to
combine the money management efforts serving your investment with those of a
similar mutual fund. For this reason, we are proposing a merger of your fund,
John Hancock Tax-Exempt Income Fund, into the John Hancock Tax-Free Bond Fund.
YOUR BOARD OF TRUSTEES BELIEVES THAT THIS MERGER IS APPROPRIATE GIVEN THAT BOTH
FUNDS PURSUE A SIMILAR INVESTMENT OBJECTIVE.
Please take the time to read the enclosed materials and cast your vote on the
enclosed proxy card. Please vote promptly. It is extremely important, no matter
how many shares you own.
Comparative performance information, investment objectives and policies are
described at length for both funds in the enclosed Proxy Statement. We believe
that this merger will benefit you in two ways:
1. LOWER FUND EXPENSES. Your Trustees firmly believe that combining these
two funds many benefit shareholders by allowing the Fund to capitalize on
expected economies of scale in investment research, operations and other
important areas. By creating a larger combined fund, the merger may lead to
reduced expenses and, ultimately, lower costs for you.
2. INCREASED INVESTMENT DIVERSIFICATION. By combining both funds' assets
into a single portfolio, the Tax-Free Bond Fund will be able to achieve
greater diversification.
YOUR VOTE IS IMPORTANT!
At a special meeting of shareholders to be held on May 2, 1996 at 9:00 a.m., you
will be asked to approve the merger of the Tax-Exempt Income Fund into the
Tax-Free Bond Fund. Your Board of Trustees has unanimously approved the merger.
We urge you to exercise your right as a shareholder and to vote by completing,
signing and returning the enclosed proxy ballot form to us immediately. Your
prompt response will help avoid the necessity for additional mailings at your
Fund's expense. For your convenience, we have provided a postage-paid envelope.
If you have questions, please call our Financial Advisor or John Hancock Funds
Customer Service Representative at 1-800-225-5291, Monday through Friday
between 8:00 a.m. and 8:00 p.m. Eastern time. Thank you for your prompt
attention to these important matters.
Sincerely,
Edward J. Boudreau, Jr.
Chairman and CEO
Enclosure
<PAGE> 5
JOHN HANCOCK TAX-EXEMPT INCOME FUND
101 Huntington Avenue
Boston, Massachusetts 02199
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 2, 1996
Notice is hereby given that a Special Meeting of Shareholders (the
"Meeting") of John Hancock Tax-Exempt Income Fund ("Tax-Exempt Income Fund"), a
Massachusetts business trust, will be held at 101 Huntington Avenue, Boston,
Massachusetts 02199 on Thursday, May 2, 1996 at 9:00 a.m., Boston time, and at
any adjournment of the Meeting, for the following purposes:
1. To consider and act upon a proposal to approve an Agreement and
Plan of Reorganization between Tax-Exempt Income Fund and John Hancock Tax-Free
Bond Fund ("Tax-Free Bond Fund"), a Massachusetts business trust, providing for
Tax-Free Bond Fund's acquisition of all of Tax-Exempt Income Fund's assets in
exchange solely for the assumption of Tax-Exempt Income Fund's liabilities, and
the issuance of Class A and Class B shares of Tax-Free Bond Fund to Tax-Exempt
Income Fund for distribution to its shareholders.
2. To consider and act upon any other matters that may properly
come before the Meeting or any adjournment of the Meeting.
The Board of Trustees has fixed the close of business on March 6, 1996
as the record date to determine the shareholders who are entitled to receive
this notice and to vote at the Meeting and any adjournment of the Meeting.
If you cannot attend the Meeting in person, please complete, date and
sign the enclosed proxy and return it to John Hancock Investor Services
Corporation, 101 Huntington Avenue, Boston, Massachusetts 02199 in the enclosed
envelope. It is important that you exercise your right to vote. THE ENCLOSED
PROXY IS BEING SOLICITED BY THE BOARD OF TRUSTEES OF JOHN HANCOCK TAX-EXEMPT
INCOME FUND.
By order of the Board of Trustees,
THOMAS H. DROHAN, Secretary
Boston, Massachusetts
March 18, 1996
<PAGE> 6
JOHN HANCOCK TAX-EXEMPT INCOME FUND
PROXY STATEMENT
______________________
JOHN HANCOCK TAX-FREE BOND FUND
PROSPECTUS
______________________
This Proxy Statement and Prospectus sets forth the information you
should know before voting on the proposed reorganization of John Hancock
Tax-Exempt Income Fund ("Tax-Exempt Income Fund") into John Hancock Tax-Free
Bond Fund ("Tax-Free Bond Fund"). Please read it carefully and retain it for
future reference.
This Proxy Statement and Prospectus includes the Prospectus of
Tax-Free Bond Fund for Class A and Class B shares, dated May 1, 1995 as
supplemented January 15, 1996 (EXHIBIT A attached). Information about
Tax-Exempt Income Fund's shares is incorporated by reference from the
Tax-Exempt Income Fund Prospectus which is available at no charge upon request
to Tax-Exempt Income Fund at 1-800-225-5291.
A Statement of Additional Information, dated March 18, 1996, relating
to this Proxy Statement and Prospectus, and containing additional information
about each of Tax-Free Bond Fund and Tax-Exempt Income Fund, including
historical financial statements, is on file with the Securities and Exchange
Commission ("SEC"). It is available from Tax-Free Bond Fund upon telephone
request and at no charge at the toll-free number stated above. The Statement
of Additional Information is incorporated by reference into this Prospectus.
This Proxy Statement and Prospectus relates to Class A and Class B
shares of beneficial interest, par value of $0.01 per share (collectively, the
"Tax-Free Bond Fund Shares"), of Tax-Free Bond Fund which will be issued in
exchange for all of Tax-Exempt Income Fund's assets. In exchange for these
assets, Tax-Free Bond Fund will also assume all of the liabilities of
Tax-Exempt Income Fund.
________________________
(continued on next page)
SHARES OF TAX-FREE BOND FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR
GUARANTEED OR ENDORSED BY, ANY BANK OR OTHER DEPOSITORY INSTITUTION, AND THE
SHARES OF TAX-FREE BOND FUND ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
<PAGE> 7
(continued)
__________________
The Tax-Free Bond Fund Class A Shares issued to Tax-Exempt Income Fund
for distribution to Tax-Exempt Income Fund's Class A shareholders will have an
aggregate net asset value equal to the aggregate net asset value of Tax-Exempt
Income Fund's Class A shares. The Tax-Free Bond Fund Class B Shares issued to
Tax-Exempt Income Fund for distribution to Tax-Exempt Income Fund's Class B
shareholders will have an aggregate net asset value equal to the aggregate net
asset value of Tax-Exempt Income Fund's Class B Shares. The asset values of
Tax-Exempt Income Fund and Tax-Free Bond Fund will be determined at the close
of business (4:00 p.m. Eastern Time) on the Closing Date (as defined below) for
purposes of the proposed reorganization.
Following the receipt of Tax-Free Bond Fund Shares (1) Tax-Exempt
Income Fund will be liquidated, (2) the Tax-Free Bond Fund Shares will be
distributed to Tax-Exempt Income Fund's shareholders pro rata in exchange for
their shares of Tax-Exempt Income Fund and (3) Tax-Exempt Income Fund will be
terminated. Consequently, Class A Tax-Exempt Income Fund shareholders will
become Class A shareholders of Tax-Free Bond Fund, and Class B Tax-Exempt
Income Fund shareholders will become Class B shareholders of Tax-Free Bond
Fund. These transactions are collectively referred to in this Proxy Statement
and Prospectus as the "Reorganization." The Reorganization is being structured
as a tax-free reorganization so that, in the opinion of tax counsel, no gain or
loss will be recognized by Tax-Free Bond Fund, Tax-Exempt Income Fund or the
shareholders of Tax-Exempt Income Fund. The terms and conditions of the
Reorganization are more fully described in this Proxy Statement and Prospectus,
and in the Agreement and Plan of Reorganization that is attached as EXHIBIT B.
Tax-Free Bond Fund is a diversified open-end management investment
company organized as a Massachusetts business trust in 1989. Tax-Free Bond
Fund seeks to obtain as high a level of interest income exempt from federal
income taxes as is consistent with preservation of capital. Tax-Free Bond Fund
seeks to obtain this objective by investing primarily in municipal obligations,
including bonds, notes and commercial paper, the interest on which is exempt
from federal income taxes.
The principal place of business of both Tax-Free Bond Fund and
Tax-Exempt Income Fund is at 101 Huntington Avenue, Boston, Massachusetts
02199. Their toll-free telephone number is 1-800-225-5291.
The date of this Proxy Statement and Prospectus is March 18, 1996.
<PAGE> 8
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C>
INTRODUCTION................................................... 1
SUMMARY........................................................ 2
RISK FACTORS AND SPECIAL CONSIDERATIONS........................ 19
INFORMATION CONCERNING THE MEETING............................. 21
PROPOSAL TO APPROVE AGREEMENT AND PLAN OF REORGANIZATION....... 23
CAPITALIZATION................................................. 30
COMPARATIVE PERFORMANCE INFORMATION............................ 31
BUSINESS OF TAX-EXEMPT INCOME FUND............................. 35
General................................................ 35
Investment Objective and Policies...................... 35
Trustees............................................... 36
Investment Adviser and Distributor..................... 36
Expenses............................................... 36
Custodian and Transfer Agent........................... 36
Tax-Exempt Income Fund Shares.......................... 36
Purchase of Tax-Exempt Income Fund Shares.............. 36
Redemption of Tax-Exempt Income Fund Shares............ 36
Dividends, Distributions and Taxes..................... 37
BUSINESS OF TAX-FREE BOND FUND................................. 37
Investment Objective and Policies...................... 37
Trustees............................................... 37
Investment Adviser and Distributor..................... 37
Expenses............................................... 37
Custodian and Transfer Agent........................... 37
Tax-Free Bond Fund Shares.............................. 38
Purchase of Tax-Free Bond Fund Shares.................. 38
Redemption of Tax-Free Bond Fund Shares................ 38
Dividends, Distributions and Taxes..................... 38
EXPERTS........................................................ 38
AVAILABLE INFORMATION.......................................... 38
EXHIBIT B...................................................... B-1
</TABLE>
-i-
<PAGE> 9
EXHIBITS
A - Prospectus of John Hancock Tax-Free Bond Fund for Class A and
Class B shares, dated May 1, 1995 as supplemented January 15, 1996
(attached to this document).
B - Agreement and Plan of Reorganization by and between John Hancock Tax-Exempt
Income Fund and John Hancock Tax-Free Bond Fund (attached to this document).
C - Annual Report to Shareholders of John Hancock Tax-Free Bond Fund, dated
December 31, 1995 (included with this document).
-ii-
<PAGE> 10
PROXY STATEMENT AND PROSPECTUS
FOR SPECIAL MEETING OF SHAREHOLDERS OF
JOHN HANCOCK TAX-EXEMPT INCOME FUN
TO BE HELD ON MAY 2, 1996
INTRODUCTION
This Proxy Statement and Prospectus is furnished in connection with the
solicitation of proxies by the Board of Trustees of Tax-Exempt Income Fund (the
"Board of Trustees"). The proxies will be voted at the Special Meeting of
Shareholders (the "Meeting") of Tax-Exempt Income Fund to be held at 101
Huntington Avenue, Boston, Massachusetts 02199 on Thursday, May 2, 1996 at 9:00
a.m., Boston time, and at any adjournment or adjournments of the Meeting. The
purposes of the Meeting are set forth in the accompanying Notice of Special
Meeting of Shareholders.
This Proxy Statement and Prospectus (i) incorporates by reference the
Prospectus of Tax-Exempt Income Fund, dated May 1, 1995 as supplemented
December 11, 1995 (the "Tax-Exempt Income Fund Prospectus") which is available
upon request and (ii) includes the prospectus of Tax-Free Bond Fund for Class A
and Class B shares, dated May 1, 1995 as supplemented January 15, 1996 (the
"Tax-Free Bond Fund Prospectus"). The Annual Report to Shareholders of Tax-Free
Bond Fund, dated December 31, 1995, is included with this Proxy Statement and
Prospectus. These materials will be mailed to shareholders of Tax-Exempt Income
Fund on or after March 18, 1996. Tax-Exempt Income Fund's Annual Report to
Shareholders was previously sent to shareholders of Tax-Exempt Income Fund on
or about February 29, 1996.
As of March 6, 1996, _______ shares of beneficial interest of Tax-Exempt
Income Fund were outstanding. Shareholders of record on March 6, 1996 (the
"Record Date") are entitled to notice of and to vote at the Meeting.
All properly executed proxies received by management prior to the Meeting,
unless revoked, will be voted at the Meeting according to the instructions on
the proxies. If no instructions are given, shares of Tax-Exempt Income Fund
represented by proxies will be voted FOR the proposal (the "Proposal") to
approve the Agreement and Plan of Reorganization (the "Agreement") between
Tax-Exempt Income Fund and Tax-Free Bond Fund.
The Board of Trustees knows of no business to be presented for
consideration at the Meeting other than that mentioned in the immediately
preceding paragraph. If other business is properly brought before the Meeting,
proxies will be voted according to the best judgment of the persons named as
proxies.
In addition to the mailing of these proxy materials, proxies may be
solicited in person or by telephone by Trustees, officers
-1-
<PAGE> 11
and employees of Tax-Exempt Income Fund; by personnel of Tax-Exempt Income
Fund's investment adviser, John Hancock Advisers, Inc. (the "Adviser") and its
transfer agent,John Hancock Investor Services Corporation ("Investor Services");
or by broker-dealer firms. Investor Services has agreed to provide proxy
solicitation services to Tax-Exempt Income Fund at a cost of approximately
$5,000. Investor Services is providing this proxy solicitation service to
Tax-Exempt Income Fund at a lower cost than would be charged by a third party
solicitation firm.
Tax-Exempt Income Fund and Tax-Free Bond Fund (each, a "Fund" and
collectively, the "Funds") will each bear its own fees and expenses in
connection with the Reorganization discussed in this Proxy Statement and
Prospectus.
The information concerning Tax-Exempt Income Fund in this Proxy Statement
and Prospectus has been supplied by Tax-Exempt Income Fund. The information
concerning Tax-Free Bond Fund in this Proxy Statement and Prospectus has been
supplied by Tax-Free Bond Fund.
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement and Prospectus. The summary is qualified by reference to
the more complete information contained in this Proxy Statement and Prospectus,
and in the EXHIBITS attached to or included with this document. Please read this
entire Proxy Statement and Prospectus carefully.
REASONS FOR THE PROPOSED REORGANIZATION
Tax-Exempt Income Fund's Board of Trustees has determined that the proposed
Reorganization is in the best interests of Tax-Exempt Income Fund and its
shareholders. In making this determination, the Trustees considered several
relevant factors, including (i) the fact that Tax-Exempt Income Fund
shareholders will be subject to lower Rule 12b-1 fees from the Closing until
December 23, 1996 or later, (ii) the fact that the Adviser has agreed to reduce
the management fee rate applicable to Tax-Free Bond Fund to the same rate
applicable to Tax-Exempt Income Fund if the shareholders of Tax-Exempt Income
Fund approve the Reorganization, (iii) the fact that the investment objectives
and policies of the Funds are substantially similar, (iv) the likelihood that
the Reorganization will result in improved economies of scale over time and a
corresponding decrease in the total expenses currently borne by Tax-Exempt
Income Fund's shareholders, and (v) the fact that combining the Funds' assets
into a single portfolio will enable Tax-Free Bond Fund to achieve greater
diversification than either Fund is now able to achieve. Tax-Exempt Income
Fund's Board of Trustees believes that the Tax-Free Bond Fund shares received in
the Reorganization will
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<PAGE> 12
provide existing Tax-Exempt Income Fund shareholders with substantially the same
investment advantages that they currently enjoy at a comparable level of risk.
For a more detailed discussion of the reasons for the proposed Reorganization,
see "Proposal to Approve the Agreement and Plan of Reorganization -- Reasons for
the Proposed Reorganization."
THE FUNDS' EXPENSES
Both Funds and their shareholders are subject to various fees and expenses.
The tables set forth below show the shareholder transaction and operating
expenses of Class A and Class B shares of the Funds and the effect of applicable
expense limitations. With respect to each Fund, these expenses are based on fees
and expenses incurred during the Fund's fiscal year ended December 31, 1995.
<TABLE>
TAX-EXEMPT INCOME FUND
<CAPTION>
Class A Class B
Shares Shares
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(As a percentage of offering price)................ 4.50%* None
Maximum sales charge imposed on reinvested
dividends.......................................... None None
Maximum deferred sales charge.......................... None* 5.00%
Redemption fee ........................................ None None
Exchange fee........................................... None None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management fee......................................... 0.55% 0.55%
12b-1 fee **........................................... 0.30% 1.00%
Other expenses***...................................... 0.20% 0.20%
Total Fund operating expenses.......................... 1.05% 1.75%
<FN>
* No sales charge is payable at the time of purchase on investments in Class A
shares of $1 million or more, but a contingent deferred sales charge may
be imposed on these investments in the event of certain redemption
transactions within 12 months after the end of the calendar month in which
the purchase was made.
** The amount of the 12b-1 fee used to cover service expenses will be up to
0.25% of the Fund's average net assets, and the remaining portion will be
used to cover distribution expenses.
*** Other Expenses include transfer agent, legal, audit, custody and other expenses.
</TABLE>
-3-
<PAGE> 13
- Redemption by wire fee (currently $4.00) not included.
<TABLE>
TAX-FREE BOND FUND
<CAPTION>
Class A Class B
Shares Shares
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases
(As a percentage of offering price)................................................ 4.50%* None
Maximum sales charge imposed on reinvested
dividends.......................................................................... None None
Maximum deferred sales charge.......................................................... None* 5.00%
Redemption fee-........................................................................ None None
Exchange fee........................................................................... None None
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management fee (net of limitation)**................................................... 0.43% 0.43%
12b-1 fee (net of limitation-Class B shares)***........................................ 0.15% 0.90%
Other expenses****..................................................................... 0.27% 0.27%
Total Fund operating expenses
(net of limitation)*****........................................................... 0.85% 1.60%
---- ----
<FN>
* No sales charge is payable at the time of purchase on
investments in Class A shares of $1 million or more, but for these
investments a contingent deferred sales charge may be imposed in the
event of certain redemption transactions within 12 months after the end
of the calendar month in which the purchase was made.
** In the absence of the Adviser's and the Fund's agreement not to impose a
portion of the management fee, the fee would have been 0.55% of average
annual net assets.
*** The amount of the 12b-1 fee for Class B shares used to cover service
expenses will be up to 0.25% of the Fund's average net assets, and the
remaining portion will be used to cover distribution expenses.
**** Other Expenses include transfer agent, legal, audit, custody and other
expenses.
***** Total Fund operating expenses in the table reflect voluntary limitations
by the Adviser and the Fund's distributor. Without such limitations the
total Fund operating expenses of Class A shares and Class B shares would
be 0.97% and 1.72%, respectively
- Redemption by wire fee (currently $4.00) not included.
</TABLE>
TAX-FREE BOND FUND (PRO FORMA)
The table set forth below shows the pro forma operating expenses of
Class A and Class B shares of Tax-Free Bond Fund which assumes (i) that the
Reorganization took place on December 31, 1995; (ii) that the Rule 12b-1 fee for
Class A shares was 0.25%;
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<PAGE> 14
(iii) that the Adviser has reduced the management fee to the same rate as that
of Tax-Exempt Income Fund; and (iv) that the Fund's distributor is paid the
entire amount of the Class B Rule 12b-1 fee.
<TABLE>
<CAPTION>
Class A Class B
Shares Shares
------- -------
<S> <C> <C>
ANNUAL FUND OPERATING EXPENSES
(As a percentage of average net assets)
Management fee ............................................... 0.55% 0.55%
12b-1 fee*.................................................... 0.25% 1.00%
Other expenses**.............................................. 0.21% 0.21%
Total Fund operating expenses
(net of reductions)....................................... 1.01% 1.76%
---- ----
<FN>
* The amount of the 12b-1 fee used to cover service expenses will be up to
0.25% of the Fund's average net assets attributable to Class A and Class B
shares, respectively, and any remaining portion (up to 0.75% with respect
to Class B shares) will be used to cover distribution expenses.
** Other expenses include transfer agent, legal, audit, custody and other expenses.
</TABLE>
If the Reorganization is consummated, the actual total operating
expenses of Class A and Class B shares of Tax-Free Bond Fund may vary from the
pro forma operating expenses indicated above due to changes in the net asset
values of Tax-Exempt Income Fund and/or Tax-Free Bond Fund between December 31,
1995 and the Closing Date (defined below).
EXAMPLE
The following example illustrates the expenses you would pay on a
$1,000 investment under the existing fees for Class A and Class B shares of each
of Tax-Exempt Income Fund and Tax-Free Bond Fund and under the pro forma fees if
the Reorganization had occurred on December 31, 1995. The example assumes (1) a
5% annual return and (2) redemption at the end of each time period.
<TABLE>
<CAPTION>
Class A Class B
Shares Shares Class A Class B Pro Pro
Tax-Exempt Tax-Exempt Shares Shares Forma Forma
Income Income Tax-Free Tax-Free Class A Class B
Fund Fund Bond Bond Shares Shares
---------- ---------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
1 year $ 55 $ 68 $ 53 $ 66 $ 55 $ 68
3 years 77 85 71 80 76 85
5 years 100 115 90 107 98 115
10 years 167 188 145 170 163 188
</TABLE>
-5-
<PAGE> 15
Assuming there is no redemption at the end of each time period, the
expenses you would pay on the same investment would be as follows:
<TABLE>
<CAPTION>
Class B
Shares Class B Pro
Tax-Exempt Shares Forma
Income Tax-Free Class B
Fund Bond Fund Shares
---------- ---------- ---------
<S> <C> <C> <C>
1 year $ 18 $ 16 $ 18
3 years 55 50 55
5 years 95 87 95
10 years 188 170 188
</TABLE>
The purpose of this example and the tables set forth above is to help
you understand the various costs and expenses of investing in each of the Funds
and what the costs would be had the Reorganization already occurred. The example
above should not be considered a representation of future expenses of the Funds
or of Tax-Free Bond Fund after the Reorganization. Actual expenses may vary from
year to year and may be higher or lower than those shown above.
THE FUNDS' INVESTMENT ADVISER
John Hancock Advisers, Inc. acts as investment adviser to both
Tax-Exempt Income Fund and Tax-Free Bond Fund.
BUSINESS OF TAX-EXEMPT INCOME FUND
Tax-Exempt Income Fund is a diversified open-end management investment
company organized as a Massachusetts business trust in 1976. As of December 31,
1995, Tax-Exempt Income Fund's net assets were $504,377,839.
All investment decisions for Tax-Exempt Income Fund are made by Mr.
Thomas C. Goggins, the Fund's portfolio manager. Mr. Goggins will continue to
make all investment decisions for the Fund until the Reorganization.
BUSINESS OF TAX-FREE BOND FUND
Tax-Free Bond Fund is a diversified open-end management investment
company organized as a Massachusetts business trust in 1989. As of December 31,
1995, Tax-Free Bond Fund's net assets were $195,621,071.
Mr. Thomas C. Goggins is Senior Vice President of the Adviser and
portfolio manager of the Fund. Mr. Goggins heads up the Adviser's team of
municipal managers and analysts.
-6-
<PAGE> 16
COMPARISON OF INVESTMENT OBJECTIVES AND POLICIES OF TAX-EXEMPT INCOME FUND AND
TAX-FREE BOND FUND
-7-
<PAGE> 17
Tax-Exempt Income Fund's investment objective is non-fundamental and
may be changed by a vote of the Fund's Board of Trustees without shareholder
approval. Tax-Free Bond Fund's investment objective is fundamental and may not
be changed without shareholder approval.
In considering whether to approve the Reorganization, you should
consider any differences between the two Funds' investment policies. For a
discussion of the risks associated with an investment in the Funds, see "Risk
Factors and Special Considerations."
<TABLE>
<CAPTION>
TAX-EXEMPT INCOME FUND TAX-FREE BOND FUND
<S> <C> <C>
Investment Objective: The Fund seeks to provide The Fund seeks to obtain as
as high a level of dividend high a level of interest
income exempt from Federal income exempt from Federal
income tax as is consistent income taxes as is consistent
with preservation of capital with preservation of capital.
and the Fund's requirements
for liquidity.
</TABLE>
-8-
<PAGE> 18
<TABLE>
<CAPTION>
<S> <C> <C>
Primary Investments: The types of The types of
securities in securities in
which the Fund which the Fund
may invest include: may invest include:
(1) municipal bonds (1) municipal bonds, notes and
and other securities commercial paper, the interest
(including certain on which is exempt from Federal
industrial income taxes, including debt
development or private obligations issued by or on behalf of
activity bonds) the the states, territories and possessions
interest on which is, of the United States; the District of
at the time of issue, Columbia; and the political subdivisions,
excludable from gross agencies or instrumentalities thereof
income for Federal ("Municipal Obligations"); and
income tax purposes
("Tax-Exempt Bonds")
and short-term municipal
debt instruments ("Short-
Term Municipals");
and
(2) cash, receivables and (2) pending investment
short-term taxable investments in Municipal Obligations
such as (a) U.S.Treasury and to meet redemption requests,
obligations,(b) obligations of private activity bonds (the
agencies and instrumentalities interest on which may be treated
of the U.S.Government and (c) as a tax preference item under
money market instruments the Federal alternative minimum
("Short-Term Taxable Investments). tax) and in taxable money market
securities including (a) obligations
issued or guaranteed by the U.S.
Government, its agencies,
instrumentalities or authorities,
(b) corporate debt securities,
(c) commercial paper,
(d) certificates of
</TABLE>
-9-
<PAGE> 19
<TABLE>
<CAPTION>
<S> <C> <C>
deposit of domestic banks
with assets of $1 billion
or more, and (e) repurchase
agreements secured by U.S.
Government securities ("Taxable
Securities").
Investment Policies: (1) At least 85% of the (1) At least 80% of the Fund's
Fund's total assets will total assets will be invested
consist of Tax-Exempt Bonds, in Municipal Obligations;
the interest on which is not
treated as a tax preference
item under the Federal
alternative minimum tax;
(2) At least 65% of the (2) At least 65% of the
Fund's investments in Fund's total assets will
(a) Tax-Exempt Bonds normally be invested in
will be rated in the three municipal bonds rated at
highest ratings by an NRSRO least investment grade by
and (b) Short-Term Municipals an NRSRO or, if unrated,
will be rated within the three determined by the Adviser
highest ratings by an NRSRO; to be of comparable quality;
(3) No more than 15% of the (3) no more than 20% of the
Fund's total assets will consist Fund's total assets will be
of Short-Term Taxable Investments; invested in Taxable Securities
and no more than 25% of the Fund's except that, for temporary
total assets will be invested in defensive purposes, up to 100%
Short-Term Municipals. of the Fund's total assets may
be invested in taxable money
market certificates rated in
the three highest ratings by
an NRSRO or, if unrated,
determined by the Adviser
to be of comparable quality.
</TABLE>
-10-
<PAGE> 20
<TABLE>
<CAPTION>
<S> <C> <C>
(4) Up to 35% of the Fund's (4) Up to 35% of the Fund's
total assets may be invested total assets may be invested
in Tax-Exempt Bonds rated B in municipal bonds and notes rated
or better by an NRSRO and up B or better by an NRSRO or, if
to 20% of the Fund's assets unnrated, determined by the
may be invested in unrated Adviser to be of comparable
long-term Tax-Exempt Bonds quality.
determined by the Adviser to
be of comparable quality to
the ratings described above.
(5) No corresponding requirement. (5) No more than 25% of the
Fund's total assets may be
invested in industrial
development or pollution
control bonds which are
dependent, directly or
indirectly, on the
revenues or credit of
private entities in any
one industry;
(6) The Fund's average (6) There is no limit on
portfolio maturity ranges the Fund's average portfolio
from 20 to 25 years. maturity.
Investment
Restrictions: The investment restrictions applicable to Tax-Free Bond Fund are substantially
similar to or more restrictive than those of Tax-Exempt Income Fund,except as
noted below:
(1) The Fund may not borrow (1) The Fund may not borrow
money, except from banks as money, except from banks as
a temporary measure and not a temporary or emergency
to exceed 5% of the Fund's total measure and not to exceed 15%
assets. of the Fund's total assets.
</TABLE>
-11-
<PAGE> 21
<TABLE>
<S> <C> <C>
(2) The Fund may not purchase (2) The Fund may not invest
restricted securities. more than 10% of its assets
in restricted securities.
Other Investments The Fund may invest up to The Fund may purchase tax-exempt
5% of its assets in certificates participation interests and
of participation in municipal lease municipal lease obligations, lend
obligations, lend portfolio its portfolio securities, enter
securities, enter into repurchase into repurchase agreements, purchase
agreements, purchase securities on restricted and illiquid securities,
a forward commitment or when-issued purchase securities on a when-issued
basis, buy and sell municipal bond or forward commitment basis, buy and
index futures contracts, interest sell call and put options on debt
rate futures contracts and related securities in which it may invest and
options, invest in variable rate on indices composed of debt securities
and floating rate obligations and in which it may invest, take straddle positions,
engage in short-term trading. buy and sell interest rate and municipal
bond index futures contracts and options
on such contracts, and invest in variable
and floating rate instruments.
</TABLE>
FORM OF ORGANIZATION
Tax-Exempt Income Fund is a Massachusetts business trust organized in
1976. Tax-Free Bond Fund is a Massachusetts business trust organized in 1989.
Both Funds have authorized and outstanding Class A and Class B shares. After the
Reorganization, Tax-Exempt Income Fund's Class A and Class B shareholders will
become Class A and Class B shareholders, respectively, of Tax-Free Bond Fund and
therefore will become subject to Tax-Free Bond
-12-
<PAGE> 22
Fund's Declaration of Trust ("Declaration of Trust"). Although there
are some differences between the provisions applicable to each Fund, the only
material differences in shareholder rights are as follows: (i) the Trustees
of Tax-Exempt Income Fund have a greater ability to amend the Fund's
Declaration of Trust without shareholder approval than do the Trustees of
Tax-Free Bond Fund, although the Trustees in both cases are subject to similar
limitations, and (ii) Tax-Exempt Income Fund's Declaration of Trust requires the
affirmative vote of a higher percentage of shareholders to approve a merger,
consolidation or sale of all or substantially all of the assets of the Fund or
to approve the termination of the Fund than does the Declaration of Trust of
Tax-Free Bond Fund.
Each share of a class of each Fund represents an equal proportionate
interest in the assets belonging to that Fund. The shares of each Fund's
classes represent an interest in the same portfolio of investments of that Fund
that are allocated to that class. Except as stated below, each Fund's classes
have equal rights as to voting, redemption, dividends and liquidation. Each
class bears different distribution and transfer agent fees and may bear other
expenses properly attributable to that class. Shareholders of each Fund's
classes have exclusive voting rights with respect to the Rule 12b-1
distribution plan relating to their respective class of shares.
SALES CHARGES AND DISTRIBUTION AND SERVICES FEES
Sales Charges. Both Funds impose an initial sales charge on Class A shares
as described above in the table under the caption "The Funds' Expenses." An
initial sales charge does not apply to Class A shares acquired through the
reinvestment of dividends from net investment income or capital gain
distributions.
Tax-Free Bond Fund Class A Shares acquired by Tax-Exempt Income Fund's
Class A shareholders pursuant to the Reorganization will not be subject to any
initial sales charge or contingent deferred sales charge ("CDSC") at the time of
the Reorganization but will remain subject to any applicable CDSC upon
redemption of those shares.
Tax-Free Bond Fund and Tax-Exempt Income Fund do not impose an initial sales
charge on Class B shares. However, Class B shares redeemed within six years of
purchase will be subject to a CDSC at the rates set forth below. This CDSC will
be assessed on an amount equal to the lesser of the current market value or the
original purchase cost of the Class B shares being redeemed. Accordingly, Class
B shareholders will not be assessed a CDSC on an increase in account value
above the initial purchase price, including shares derived from reinvested
dividends. The amount of the CDSC, if any, will vary depending on the number of
years from the time the Class B shares were purchased until the time they are
redeemed, as follows:
-13-
<PAGE> 23
<TABLE>
<CAPTION>
Year in Which Class B The CDSC as a Percentage
Shares Redeemed of Dollar Amount
Following Purchase Subject to CDSC
- --------------------- ------------------------
<S> <C>
First 5.0%
Second 4.0%
Third 3.0%
Fourth 3.0%
Fifth 2.0%
Sixth 1.0%
Seventh and thereafter None
</TABLE>
Class B shares of Tax-Free Bond Fund acquired by Tax-Exempt Income Fund's
Class B shareholders pursuant to the Reorganization will not be subject to any
CDSC at the time of the Reorganization, but will remain subject to any CDSC
applicable upon redemption of these shares. For purposes of computing the CDSC
payable upon redemption of Class B shares of Tax-Free Bond Fund acquired
pursuant to the Reorganization and the schedule for automatic conversion of
Class B shares into Class A shares, the holding period of the Tax-Exempt Income
Fund Class B shares will be added to that of the Tax-Free Bond Fund Class B
shares acquired in the Reorganization.
Distribution and Service Fees. Both Funds have adopted distribution plans
pursuant to Rule 12b-1 under the Investment Company Act. Under these plans, each
Fund may pay fees to John Hancock Funds, Inc. ("John Hancock Funds") to
reimburse distribution and service expenses incurred in connection with the
Funds' Class A shares. With respect to Tax-Exempt Income Fund Class A shares,
these fees are payable at an annual rate of up to 0.30% of the average daily net
assets of the Fund attributable to Class A shares. With respect to Tax-Free Bond
Fund Class A shares, these fees are payable at an annual rate of up to 0.15% of
the average daily net assets of the Fund attributable to Class A shares. Of the
fee payable by each Fund, up to 0.25% and 0.15%, respectively, of the net assets
of Tax-Exempt Income Fund and Tax-Free Bond Fund attributable to Class A shares
may be used for service expenses and any remainder for distribution expenses.
The fee with respect to Tax-Free Bond Fund Class A shares will increase to 0.25%
on or after December 23, 1996 if the shareholders of Tax-Free Bond Fund approve
the increase at their June 1996 special meeting of shareholders.
In addition, under the plans, each Fund may pay fees to John Hancock Funds
to reimburse it for distribution and service expenses incurred in connection
with Class B shares. With respect to Tax-Exempt Income Fund's Class B shares,
these fees are payable at an annual rate of up to 1.00% of the average daily net
assets of the Fund attributable to Class B shares. With respect to Tax-Free
Bond Fund Class B shares, these fees are also payable at an annual rate of up to
1.00% of the average daily net assets of the
-14-
<PAGE> 24
Fund attributable to Class B shares; however, the Fund and John Hancock
Funds have agreed to limit the payment of expenses pursuant to the Tax-Free Bond
Fund's Class B plan to 0.90%. Of the fee payable by each Fund, up to 0.25% of
the net assets of each Fund attributable to Class B shares may be used for
service expenses and the remainder for distribution expenses. The agreement with
John Hancock Funds to limit the payment of Class B Rule 12b-1 fees to 0.90% will
terminate on or after December 23, 1996, after which the fee with respect to
Tax-Free Bond Fund Class B shares will increase to 1.00%.
PURCHASES AND EXCHANGES
Shares of each Fund may be purchased through certain broker-dealers and
through John Hancock Funds at the public offering price, which is based on the
next determined net asset value per share, plus any applicable sales charge. The
minimum initial investment in shares of each Fund is $1,000 ($250 for group
investments and, with respect to Tax-Free Bond Fund, retirement plans). In
anticipation of the Reorganization, after the Record Date, no new accounts may
be opened in Tax-Exempt Income Fund. Existing shareholders of Tax-Exempt Income
Fund may continue to acquire shares of the Fund after the Record Date by direct
purchase, through a monthly automatic accumulation plan or through the
reinvestment of dividends and distributions.
Shareholders of each Fund may exchange their shares at net asset value for
shares of the same class, if applicable, of other John Hancock funds. For this
purpose, the shares of John Hancock funds with only one class of shares are
treated as Class A shares whether or not they have been so designated. Shares of
any fund acquired by exchange that are subject to a CDSC will incur the CDSC
upon redemption. The rate of this charge will be the rate in effect for the
exchanged shares at the time of the exchange (except that exchanges into John
Hancock Short-Term Strategic Income Fund, John Hancock Limited Term Government
Fund and John Hancock Intermediate Maturity Government Fund will be subject to
the initial fund's CDSC). The exchange privilege is available only in states
where the exchange can be made legally.
MANAGEMENT FEES
<TABLE>
Tax-Exempt Income Fund pays management fees to the Adviser as follows:
<CAPTION>
Net Asset Value Annual Rate
--------------- -----------
<S> <C>
First $500,000,000 0.55%
Next $500,000,000 0.50%
Amount over $1,000,000,000 0.45%
</TABLE>
-15-
<PAGE> 25
During the fiscal year ended December 31, 1995, Tax-Exempt Income Fund paid
investment management fees of $2,683,990 to the Adviser.
Tax-Free Bond Fund pays management fees to the Adviser equal to 0.55%
of the Fund's average daily net asset value. During the fiscal year ended
December 31, 1995, Tax-Free Bond Fund paid investment management fees of
$1,048,120 to the Adviser.
DISTRIBUTION PROCEDURES
It is the policy of both Funds to declare dividends daily and to pay
dividends monthly from net investment income. Each Fund also distributes
annually all of its other taxable income, including any net short-term and
long-term capital gains it has realized. Tax-Exempt Income Fund will make,
immediately prior to the Closing Date (as defined below), a distribution of any
net income and net realized capital gains it has not yet distributed.
REINVESTMENT OPTIONS
Unless an election is made to receive cash, the shareholders of both Funds
automatically reinvest all of their respective dividends and capital gain
distributions in additional shares of the same class of the same Fund. These
reinvestments are made at the net asset value per share and are not subject to
any sales charge.
REDEMPTION PROCEDURES
Shares of both Funds may be redeemed on any business day at a price equal
to the net asset value of the shares next determined after receipt of a
redemption request in good order, less any applicable CDSC. Alternatively,
shareholders of both Funds may sell their shares through securities dealers, who
may charge a fee. Redemptions and repurchases of Class B shares and certain
Class A shares of each Fund are subject to the applicable CDSC, if any. Class A
and Class B shares of Tax-Exempt Income Fund may be redeemed up to and including
the Closing Date (as defined below).
REORGANIZATION
Effect of the Reorganization. Pursuant to the terms of the Agreement, the
proposed Reorganization will consist of the acquisition by Tax-Free Bond Fund of
all the assets of Tax-Exempt Income Fund in exchange solely for (i) the
assumption by Tax-Free Bond Fund of all the liabilities of Tax-Exempt Income
Fund and (ii) the issuance of Tax-Free Bond Fund Class A and Class B Shares
equal to the value of these assets, less the amount of these liabilities, to
Tax-Exempt Income Fund. As part of the liquidation process, Tax-Exempt Income
Fund will immediately distribute to its shareholders these Tax-Free Bond Fund
Shares in
-16-
<PAGE> 26
exchange for their shares of Tax-Exempt Income Fund. Consequently,
Class A shareholders of Tax-Exempt Income Fund will become Class A shareholders
of Tax-Free Bond Fund and Class B shareholders of Tax-Exempt Income Fund will
become Class B shareholders of Tax-Free Bond Fund. After completion of the
Reorganization, the existence of Tax-Exempt Income Fund will be terminated.
The Reorganization will become effective as of 5:00 p.m. on the closing
date, scheduled for May 3, 1996, or another date on or before December 31, 1996
as authorized representatives of the Funds may agree (the "Closing Date"). The
Tax-Free Bond Fund Class A shares issued to Tax-Exempt Income Fund for
distribution to Tax-Exempt Income Fund's Class A shareholders will have an
aggregate net asset value equal to the aggregate net asset value of Tax-Exempt
Income Fund's Class A shares. Similarly, the Tax-Free Bond Fund Class B shares
issued to Tax-Exempt Income Fund for distribution to Tax-Exempt Income Fund's
Class B shareholders will have an aggregate net asset value equal to the
aggregate net asset value of Tax-Exempt Income Fund's Class B shares. For
purposes of the Reorganization, the Funds' respective asset values will be
determined as of the close of business (4:00 p.m. Eastern Time) on the Closing
Date.
The Board of Trustees of Tax-Exempt Income Fund, including the trustees
who are not "interested persons" of either Fund or the Adviser (the
"Independent Trustees"), approved the Reorganization, and determined that it
was in the best interests of Tax-Exempt Income Fund and that the interests of
Tax-Exempt Income Fund's shareholders would not be diluted as a result of the
Reorganization. Similarly, the Board of Trustees of Tax-Free Bond Fund,
including the Trustees not affiliated with either Fund or the Adviser, approved
the Reorganization, and determined that it was in the best interests of
Tax-Free Bond Fund and that the interests of Tax-Free Bond Fund's shareholders
would not be diluted as a result of the Reorganization.
TAX CONSIDERATIONS
The consummation of the Reorganization is subject to the receipt of an
opinion of Hale and Dorr, counsel to the Funds, satisfactory to each Fund, which
will provide generally (as more specifically set forth in the Agreement) that
with respect to the transfers and exchanges comprising the Reorganization:
(a) The acquisition by Tax-Free Bond Fund of all of the assets of
Tax-Exempt Income Fund will constitute a "reorganization" within the meaning of
Section 368(a) of the Code, and Tax-Exempt Income Fund and Tax-Free Bond Fund
will each be "a party to a reorganization" within the meaning of Section 368(b)
of the Code;
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<PAGE> 27
(b) no gain or loss will be recognized by Tax-Exempt Income Fund upon (i)
the transfer of all of its assets to Tax-Free Bond Fund and (ii) the
distribution by Tax-Exempt Income Fund of these Tax-Free Bond Fund Shares to the
shareholders of Tax-Exempt Income Fund;
(c) no gain or loss will be recognized by Tax-Free Bond Fund upon the
receipt of Tax-Exempt Income Fund's assets;
(d) the basis of the assets of Tax-Exempt Income Fund acquired by Tax-Free
Bond Fund will remain the same as immediately prior to the transfer;
(e) the tax holding period of the assets of Tax-Exempt Income Fund in the
hands of Tax-Free Bond Fund will include Tax-Exempt Income Fund's tax holding
period for those assets;
(f) the shareholders of Tax-Exempt Income Fund will not recognize gain or
loss upon the exchange of their shares of Tax-Exempt Income Fund solely for
Tax-Free Bond Fund Shares in the Reorganization;
(g) the basis of the Tax-Free Bond Fund Shares received by Tax-Exempt
Income Fund shareholders in the Reorganization will be the same; and
(h) the tax holding period of the Tax-Free Bond Fund Shares received by
Tax-Exempt Income Fund shareholders will include the tax holding period of
Tax-Exempt Income Fund shares that were held as capital assets.
THE MEETING
Time, Place and Date. The Meeting will be held on Thursday, May 2, 1996,
at 101 Huntington Avenue, Boston, Massachusetts 02199, at 9:00 a.m., Boston
time.
RECORD DATE
The Record Date for determining shareholders entitled to notice of and to
vote at the Meeting is March 6, 1996.
VOTE REQUIRED
Approval of the Agreement by the shareholders of Tax-Exempt Income Fund
requires the affirmative vote of a majority of the shares of Tax-Exempt Income
Fund outstanding and entitled to vote. For this purpose, a majority of the
outstanding shares of Tax-Exempt Income Fund means the vote of the lesser of (i)
67% or more of the shares present at the Meeting, if the holders of more than
50% of the shares of the Fund are present or represented by proxy,
-18-
<PAGE> 28
or (ii) more than 50% of the outstanding shares of the Fund ("Majority
Shareholder Vote"). The Reorganization does not require the approval of
Tax-Free Bond Fund's shareholders. See "Proposal to Approve the Agreement and
Plan of Reorganization--Voting Rights and Required Vote."
RISK FACTORS AND SPECIAL CONSIDERATIONS
Please see the Tax-Free Bond Fund Prospectus and the Tax-Exempt Income Fund
Prospectus for a more complete description of each Fund's investment objectives
and policies, as well as their risk factors. In deciding whether to approve the
Reorganization, you should consider the similarities and differences between the
Funds' investment objectives, policies and risk factors.
The investment objectives and policies of the Funds are substantially
similar. For this reason, the risks associated with an investment in the Funds
are substantially similar. Each Fund invests primarily in municipal bonds and
other securities whose interest is exempt from Federal income taxes. Under
normal circumstances, at least 80% of Tax-Free Bond Fund's total assets will be
invested in these securities and 85% of Tax-Exempt Income Fund's total assets
will be invested in these securities.
Tax-Exempt Income Fund may invest up to 35% of its total assets in
municipal securities and Tax-Free Bond Fund may invest up to 35% of its total
assets in municipal bonds and notes rated B or better by an NRSRO or, if not
rated, determined by the Adviser to be of comparable quality. These investments
are considered speculative and are commonly called "junk bonds." While
generally providing greater income than investments in higher quality
securities, these investments involve greater risk of principal and income
loss, including the possibility of default. These investments may have greater
price volatility, especially during periods of economic uncertainty or changes.
Bonds rated B are currently meeting debt service requirements but provide a
limited margin of safety and are vulnerable to default in the event of adverse
business, financial or economic conditions. In addition, the market for these
bonds may be less liquid than the market for higher rated securities.
Therefore, the Adviser's judgment at times plays a greater role in the
performance and valuation of investments in these investments.
Up to 20% of Tax-Free Bond Fund's total assets may be invested in
securities that are taxable, while only up to 15% of Tax-Exempt Income Fund's
total assets may be so invested.
-19-
<PAGE> 29
There is no limit on Tax-Free Bond Fund's average portfolio maturity.
Tax-Exempt Income Fund's average portfolio maturity ranges from 20 to 25 years.
Generally, the longer the average portfolio maturity, the greater will be the
impact of interest rate fluctuations on the value of that Fund's assets and net
asset value per share.
Tax-Free Bond Fund may buy and sell covered call and put options on debt
securities in which it may invest, and on indices composed of debt securities in
which it may invest. The Fund may also sell straddles, which are combinations of
put and call options on the same security. The Fund may make these investments
to hedge its exposure to changing interest rates and security prices. Options
are derivative instruments and may involve certain risks. If the Adviser applies
a hedge at an inappropriate time or judges market conditions incorrectly,
options may lower the Fund's return. If option prices are not correctly
correlated with the Fund's other investments or if the Fund is not able to close
out its positions, the Fund may experience losses. Also, options do not pay
interest but may produce taxable gains or losses. Tax-Exempt Income Fund may not
invest in these options or straddles.
-20-
<PAGE> 30
INFORMATION CONCERNING THE MEETING
SOLICITATION, REVOCATION AND USE OF PROXIES
The presence at the meeting of a majority of Tax-Exempt Income Fund's
outstanding shares entitled to vote will be considered a quorum for
the transaction of business. A Tax-Exempt Income Fund shareholder executing and
returning a proxy has the power to revoke it at any time before it is
exercised, by filing a written notice of revocation with Tax-Exempt Income
Fund's transfer agent, Investor Services, P.O. Box 9116, Boston, Massachusetts
02205-9116, or by returning a duly executed proxy with a later date before the
time of the Meeting. Any shareholder who has executed a proxy but is present at
the Meeting and wishes to vote in person may revoke his or her proxy by
notifying the Secretary of Tax-Exempt Income Fund (without complying with any
formalities) at any time before it is voted. Presence at the Meeting alone will
not serve to revoke a previously executed and returned proxy.
If a quorum is not present in person or by proxy at the time any session of
the Meeting is called to order, the persons named as proxies may vote those
proxies that have been received to adjourn the Meeting to a later date. If a
quorum is present but there are not sufficient votes in favor of the Proposal,
the persons named as proxies may propose one or more adjournments of the Meeting
to permit further solicitation of proxies with respect to the Proposal. Any
adjournment will require the affirmative vote of a majority of the shares of
Tax-Exempt Income Fund, represented in person or by proxy, at the session of the
Meeting to be adjourned. If an adjournment of the Meeting is proposed because
there are not sufficient votes in favor of the Reorganization, the persons named
as proxies will vote those proxies in favor of the Reorganization in favor of
adjournment, and will vote those proxies against the Reorganization against
adjournment.
In addition to the solicitation of proxies by mail or in person, Tax-Exempt
Income Fund may also arrange to have votes recorded by telephone by officers and
employees of the Fund or by personnel of the Adviser or Investor Services. The
telephone voting procedure is designed to authenticate a shareholder's identity,
to allow a shareholder to authorize the voting of shares in accordance with the
shareholder's instructions and to confirm that the voting instructions have been
properly recorded. If these procedures were subject to a successful legal
challenge, these telephone votes would not be counted at the Meeting. The Fund
has not sought to obtain an opinion of counsel on this matter and is unaware of
any challenge at this time. A shareholder will be called on a recorded line at
the telephone number in the Fund's account records and will be asked the
shareholder's Social Security number or other identifying information. The
shareholder will then be given an opportunity to authorize proxies to vote his
-21-
<PAGE> 31
or her shares at the Meeting in accordance with the shareholder's instructions.
To ensure that the shareholder's instructions have been recorded correctly, the
shareholder will also receive a confirmation of the voting instructions in the
mail. A special toll-free number will be available in case the voting
information contained in the confirmation is incorrect. If the shareholder
decides after voting by telephone to attend the Meeting, the shareholder can
revoke the proxy at that time and vote the shares at the Meeting.
OUTSTANDING SHARES AND COMMON STOCK
At the close of business on March 6, 1996, _______ Class A and _______
Class B shares of beneficial interest of Tax-Exempt Income Fund were
outstanding and entitled to vote. Only Tax-Exempt Income Fund shareholders of
record at the close of business on March 6, 1996 (the "Record Date") are
entitled to notice of and to vote at the Meeting and any adjournment of the
Meeting. As of March 6, 1996, _______ Class A and _______ Class B shares of
beneficial interest of Tax-Free Bond Fund were outstanding.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT OF
TAX-EXEMPT INCOME FUND AND TAX-FREE BOND FUND
To the knowledge of Tax-Exempt Income Fund, as of February 15, 1996, the
following persons owned of record or beneficially 5% or more of the outstanding
Class A shares of beneficial interest of Tax-Exempt Income Fund:
- ---------------------.
To the knowledge of Tax-Exempt Income Fund, as of February 15, 1996, the
following persons owned of record or beneficially 5% or more of the outstanding
Class B shares of beneficial interest of Tax-Exempt Income Fund:
- ---------------------.
To the knowledge of Tax-Free Bond Fund, as of February 15, 1996, the
following persons owned of record or beneficially 5% or more of the outstanding
Class A shares of beneficial interest of Tax-Free Bond Fund: _______.
To the knowledge of Tax-Free Bond Fund, as of February 15, 1996, the
following persons owned of record or beneficially 5% or more of the outstanding
Class B shares of beneficial interest of Tax-Free Bond Fund: _______.
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<PAGE> 32
As of March 6, 1996, the Trustees and officers of Tax-Exempt Income Fund,
as a group, owned in the aggregate less than 1% of the outstanding shares of
beneficial interest of Tax-Exempt Income Fund. As of March 6, 1996, the Trustees
and officers of Tax-Free Bond Fund, as a group, owned in the aggregate less than
1% of the outstanding Class A and Class B shares of beneficial interest of
Tax-Free Bond Fund.
PROPOSAL TO APPROVE THE AGREEMENT
AND PLAN OF REORGANIZATION
GENERAL
The shareholders of Tax-Exempt Income Fund are being asked to approve the
Agreement, a copy which is attached as EXHIBIT B. The Reorganization will
consist of: (a) the transfer of all of Tax-Exempt Income Fund's assets to
Tax-Free Bond Fund, in exchange solely for the issuance of Tax-Free Bond Fund
Shares to Tax-Exempt Income Fund and the assumption of Tax-Exempt Income Fund's
liabilities by Tax-Free Bond Fund, (b) the subsequent distribution by Tax-Exempt
Income Fund, as part of its liquidation, of the Tax-Free Bond Fund Shares to
Tax-Exempt Income Fund's shareholders and (c) the termination of Tax-Exempt
Income Fund's existence. The Tax-Free Bond Fund Class A shares issued upon the
consummation of the Reorganization will have an aggregate net asset value equal
to the aggregate net asset value of the assets attributable to Tax-Exempt Income
Fund's Class A shares, less liabilities attributable to Tax-Exempt Income Fund's
Class A shares. Similarly, the Tax-Free Bond Fund Class B shares issued upon the
consummation of the Reorganization will have an aggregate net asset value equal
to the aggregate net asset value of the assets attributable to Tax-Exempt Income
Fund's Class B shares, less liabilities attributable to Tax-Exempt Income Fund's
Class B shares. As noted above, the asset values of Tax-Exempt Income Fund and
Tax-Free Bond Fund will be determined at the close of business (4:00 p.m.
Eastern Time) on the Closing Date for purposes of the Reorganization. See
"Description of Agreement" below.
Pursuant to the Agreement, Tax-Exempt Income Fund will liquidate and
distribute the Tax-Free Bond Fund Shares received, as described above, pro rata
to the shareholders of record of each class determined as of the close of
regular trading on the New York Stock Exchange on the Closing Date. The result
of the transfer of assets will be that Tax-Free Bond Fund will add to its
portfolio the net assets of Tax-Exempt Income Fund. Class A
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<PAGE> 33
shareholders of Tax-Exempt Income Fund will become Class A shareholders of Tax-
Free Bond Fund, and Class B shareholders of Tax-Exempt Income Fund will become
Class B shareholders of Tax-Free Bond Fund.
The Agreement and the Reorganization were approved by the Board of Trustees
of Tax-Exempt Income Fund at a meeting held on December 11, 1995. The Agreement
and the Reorganization were approved by the Board of Trustees of Tax-Free Bond
Fund at a meeting held on November 28, 1995. In connection with their approval
of the Reorganization, the Board of Trustees considered several matters
described in greater detail below under the caption "Reasons for the Proposed
Reorganization."
REASONS FOR THE PROPOSED REORGANIZATION
The Board of Trustees of Tax-Exempt Income Fund believes that the proposed
Reorganization will be advantageous to the shareholders of Tax-Exempt Income
Fund in several respects. The Board of Trustees considered the following
matters, among others, in approving the Proposal.
First, the Board of Trustees believes that it is not advantageous to
operate and market Tax-Exempt Income Fund separately from Tax-Free Bond Fund
because their investment objectives and policies are substantially similar. By
being offered simultaneously, each Fund hinders the other Fund's potential for
asset growth.
Second, the Board of Trustees considered that shareholders may be better
served by a fund offering greater diversification. To the extent that the Funds'
assets are combined into a single portfolio and a larger asset base is created
as a result of the Reorganization, greater diversification of Tax-Free Bond
Fund's investment portfolio can be achieved than is currently possible in either
Fund. Greater diversification is expected to be beneficial to shareholders of
both Funds because it may reduce the negative effect which the adverse
performance of any one security may have on the performance of the entire
portfolio.
Third, the Board of Trustees considered the fact that Tax-Free Bond Fund is
subject to a higher management fee rate than Tax-Exempt Income Fund. The Board
of Trustees also considered, however, the proposal by the Adviser to reduce its
management fee rate for the Tax-Free Bond Fund if the Reorganization is
approved by Tax-Exempt Income Fund's shareholders to the same rate currently
applicable to Tax-Exempt Income Fund. The Board of Trustees believes that the
decrease in
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<PAGE> 34
management fee rate will not result in Tax-Free Bond Fund receiving lower
quality of services from the Adviser. The Adviser believes that the merger may
result in a lower overall management fee rate for the current fiscal year if
the combined assets of Tax-Free Bond Fund remain in excess of $500,000,000.
Fourth, the Board of Trustees considered the fact that after the
Reorganization the assets of Tax-Free Bond Fund attributable to Tax-Exempt
Income Fund will be subject to lower Rule 12b-1 fees. The shareholders of
Tax-Free Bond Fund will, at their special meeting in June 1996, consider a
proposal by John Hancock Funds to increase the Fund's Class A Rule 12b-1 fee
from its current rate of 0.15% of average daily net assets of the Fund
attributable to the Fund's Class A share to 0.25%, yet this increased fee
remains lower than Tax-Exempt Income Fund's current Class A Rule 12b-1 fee of
0.30%. Furthermore, the increase will not take effect until December 23, 1996
or later. In addition, the Board of Trustees of Tax-Exempt Income Fund
considered John Hancock Funds' removal of the expense limitation limiting the
Class B Rule 12b-1 fee to 0.90% of average net assets of the Fund attributable
to Class B shares. As a result, the Class B Rule 12b-1 fee will increase to
1.00%, which is the same Class B Rule 12b-1 fee currently paid by Tax-Exempt
Income Fund. The Board of Trustees further considered that the Class B Rule
12b-1 fee adjustment will not occur until December 23, 1996 or later.
Fifth, the Board of Trustees believes that the Tax-Free Bond Fund Shares
received in the Reorganization will provide existing Tax-Exempt Income Fund
shareholders with substantially the same investment advantages that they
currently enjoy at a comparable level of risk. The Board of Trustees also
considered the performance history of each Fund.
Sixth, a combined fund offers economies of scale that should have a
positive effect on the expenses currently borne by Tax-Exempt Income Fund, and
hence, indirectly, its shareholders. Both Funds incur substantial costs for
accounting, legal, insurance, and custodial and administrative services. The
Board of Trustees expects that the Reorganization may result in a decrease over
time in the expenses currently borne indirectly by Tax-Exempt Income Fund's
shareholders. See expense information in "Summary--the Funds' Expenses."
The Board of Trustees considered the fact that, from the perspective of
Tax-Free Bond Fund, the Reorganization presents an excellent opportunity to
acquire assets without the obligation to pay commissions or other similar costs
that are normally associated with the purchase of securities. This opportunity
provides an economic benefit to Tax-Free Bond Fund and its shareholders.
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<PAGE> 35
The Board of Trustees also considered the fact that the Adviser and John
Hancock Funds will receive certain benefits from the Reorganization. The
consolidated portfolio management effort might result in time savings for the
Adviser and the preparation of fewer prospectuses, reports and regulatory
filings. The Trustees, however, believe that this consideration will not amount
to a significant economic benefit.
CAPITAL LOSS CARRYOVERS
As of December 31, 1995, Tax-Exempt Income Fund had capital loss
carryovers, as determined for federal income tax purposes, in the aggregate
amount of approximately $8,110,320, of which $2,374,664 expires on December 31,
2002, and $5,735,656 expires on December 31, 2003. If the Reorganization does
not occur, Tax-Exempt Income Fund may use these capital loss carryovers to
offset any net capital gain, which would reduce the amount of net capital gain
Tax-Exempt Income Fund would be required to distribute to its shareholders in
order to avoid fund level income and/or excise taxes on undistributed capital
gain.
If the Reorganization is consummated, Tax-Free Bond Fund will succeed to
and take into account Tax-Exempt Income Fund's capital loss carryovers and will
be able to use such carryovers, along with any carryovers it may have, to offset
any net capital gain, subject to certain limitations under the Code that may be
applicable because of the Reorganization and certain other changes in the past
or future share ownership of Tax-Free Bond Fund. These limitations could result
in the expiration of all or portions of such carryovers before they are fully
used.
UNREIMBURSED DISTRIBUTION AND SHAREHOLDER SERVICE EXPENSES
The Board of Trustees has determined that, if the Reorganization is
consummated, distribution and shareholder service expenses incurred in
connection with shares of Tax-Exempt Income Fund, and not reimbursed under
Tax-Exempt Income Fund's Rule 12b-1 Plans or through CDSCs, will be reimbursable
expenses under Tax-Free Bond Fund's Rule 12b-1 Plans (the "assumption").
However, the maximum aggregate amounts payable during any fiscal year under
Tax-Free Bond Fund's Rule 12b-1 Plans (0.25% of average daily net assets
attributable to Class A shares and 1.00% of average daily net assets
attributable to Class B shares) will not be affected by the assumption.
With respect to Tax-Free Bond Fund's Class A and Class B shares, the
percentage of net assets on a pro forma combined basis that the unreimbursed
expenses represent will decrease as a result of the Reorganization and the
assumption. As of December 31, 1995 the unreimbursed distribution and
shareholder service expenses of
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<PAGE> 36
Tax-Free Bond Fund attributable to Class A and Class B shares were $105,329
(.09%) of Tax-Free Bond Fund's net assets attributable to Class A shares and
$3,009,952 (3.96%) of Tax-Free Bond Fund's net assets attributable to Class B
shares, respectively. As of the same date, the unreimbursed distribution and
shareholder service expenses of Tax-Exempt Income Fund attributable to Class A
and Class B shares were $495,815 (.01%) attributable to Class A shares and
$298,337 (3.52%) of Tax-Exempt Income Fund's net assets attributable to Class B
shares, respectively.
After the Reorganization on a pro forma combined basis, the
unreimbursed distribution and shareholder service expenses of Tax-Free Bond
Fund attributable to Class A and Class B shares will be $601,144 (0.01% of
Tax- Free Bond Fund's pro forma net assets attributable to Class A shares) and
3,299,889 (3.92% of Tax-Free Bond Fund's pro forma net assets attributable to
Class B shares), respectively.
The assumption will have no immediate effect upon the payments made under
Tax-Free Bond Fund's Rule 12b-1 Plans. While John Hancock Funds hopes to recover
unreimbursed distribution and shareholder service expenses over an extended
period of time, Tax-Free Bond Fund is not obligated to assure that these amounts
are recouped by John Hancock Funds.
Unreimbursed distribution and shareholder service expenses do not currently
appear as an expense or liability in the financial statements of either Fund,
nor will they appear in the financial statements of Tax-Free Bond Fund after the
Reorganization until paid or accrued. Even in the event of termination or
noncontinuance of Tax-Free Bond Fund's Rule 12b-1 Plans, Tax-Free Bond Fund is
not legally committed, and is not required to commit, to the payment of any
unreimbursed distribution and shareholder service expenses. For this reason,
unreimbursed expenses do not enter into the calculation of a Fund's net asset
value or the formula for calculating Rule 12b-1 payments. The staff of the SEC
has not approved or disapproved the treatment of the unreimbursed distribution
and shareholder service expenses described in this Proxy Statement
BOARDS' EVALUATION AND RECOMMENDATION
On the basis of the factors described above and other factors, the Board of
Trustees, including a majority of the Independent Trustees, determined that the
Reorganization is in the best interests of Tax-Exempt Income Fund and that the
interests of Tax-Exempt Income Fund's shareholders will not be diluted as a
result of the Reorganization. On the same basis, the Board of Trustees of
Tax-Free Bond Fund, including a majority of the Independent Trustees determined
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<PAGE> 37
that the Reorganization is in the best interests of Tax-Free Bond Fund and that
the interests of Tax-Free Bond Fund's shareholders will not be diluted as a
result of the Reorganization.
THE TRUSTEES OF JOHN HANCOCK TAX-EXEMPT INCOME FUND RECOMMEND THAT THE
SHAREHOLDERS OF JOHN HANCOCK TAX-EXEMPT INCOME FUND VOTE FOR THE PROPOSAL TO
APPROVE THE AGREEMENT AND PLAN OF REORGANIZATION.
DESCRIPTION OF AGREEMENT
The following description of the Agreement is a summary, does not purport
to be complete, and is subject in all respects to the provisions of the
Agreement, and is qualified in its entirety by reference to the Agreement. A
copy of the Agreement is attached to this Proxy Statement and Prospectus as
EXHIBIT B and should be read in its entirety. Paragraph references are to
appropriate provisions of the Agreement.
Method of Carrying Out Reorganization. If Tax-Exempt Income Fund
shareholders approve the Agreement, the Reorganization will be consummated
promptly after the various conditions to the obligations of each of the parties
are satisfied (see Agreement, paragraphs 6 through 8). The Reorganization will
be completed on the Closing Date.
On the Closing Date, Tax-Exempt Income Fund will transfer all of its assets
to Tax-Free Bond Fund in exchange for Tax-Free Bond Fund Shares with an
aggregate net asset value equal to the value of the assets delivered, less the
liabilities of Tax-Exempt Income Fund assumed, as of the close of business on
the Closing Date (see Agreement, paragraphs 1 and 2).
The value of Tax-Exempt Income Fund's assets and Tax-Free Bond Fund's
net asset values per Class A share and per Class B share will be determined
according to the valuation procedures set forth in Tax-Exempt Income Fund's
Prospectus and Statement of Additional Information and in the Tax-Free Bond
Fund Prospectus, respectively (see "Share Price" in the Tax-Free Bond Fund
Prospectus).
Surrender of Share Certificates. Tax-Exempt Income Fund shareholders whose
shares are represented by one or more share certificates should, prior to the
Closing Date, either surrender their certificates to Tax-Exempt Income Fund or
deliver to Tax-Exempt Income Fund an affidavit with respect to lost
certificates, in the form and accompanied by the surety bonds that Tax-Exempt
Income Fund may require (collectively, an "Affidavit"). On the Closing Date, all
certificates which have not been surrendered will be deemed to be cancelled,
will no longer evidence ownership of Tax-Exempt Income Fund's shares and will
evidence ownership of
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<PAGE> 38
Tax-Free Bond Fund Shares. Shareholders may not redeem or transfer Tax-Free
Bond Fund Shares received in the Reorganization until they have surrendered
their Tax-Exempt Income Fund share certificates or delivered an Affidavit
relating to them. Tax-Free Bond Fund will not issue share certificates in the
Reorganization.
Conditions Precedent to Closing. The obligation of Tax-Exempt Income Fund
to consummate the Reorganization is subject to the satisfaction of certain
conditions precedent, including the performance by Tax-Free Bond Fund of all
acts and undertakings required under the Agreement and the receipt of all
consents, orders and permits necessary to consummate the Reorganization (see
Agreement, paragraphs 6 through 8).
The obligation of Tax-Free Bond Fund to consummate the Reorganization is
subject to the satisfaction of certain conditions precedent, including
Tax-Exempt Income Fund's performance of all acts and undertakings to be
performed under the Agreement, the receipt of certain documents and financial
statements from Tax-Exempt Income Fund, and the receipt of all consents, orders
and permits necessary to consummate the Reorganization (see Agreement,
paragraphs 6 through 8).
The obligations of both parties are subject to the receipt of approval and
authorization of the Agreement by the requisite vote of the holders of the
outstanding shares of beneficial interest of Tax-Exempt Income Fund in
accordance with the provisions of the Fund's Declaration of Trust, as amended,
and By-Laws and the receipt of a favorable opinion of Hale and Dorr as to the
federal income tax consequences of the Reorganization. (See Agreement, paragraph
8).
Termination of Agreement. The Agreement may be terminated, whether or not
approval of Tax-Exempt Income Fund's shareholders has been obtained, by mutual
agreement of the parties. In addition, either party may terminate its
obligations under the Agreement at or prior to the Closing Date, because of a
material breach by the other party of any representations, warranties or
agreements contained in the Agreement, or if a condition precedent in the
Agreement has not been met.
Expenses of the Reorganization. Tax-Free Bond Fund and Tax-Exempt Income
Fund will each be responsible for its own expenses incurred in connection with
entering into and carrying out the provisions of the Agreement, whether or not
the Reorganization is consummated.
Tax Considerations. The consummation of the Reorganization is subject to
the receipt of a favorable opinion of Hale and Dorr, counsel to the Funds,
satisfactory to Tax-Exempt Income Fund and Tax-Free Bond Fund and described
above under the caption "Summary--Reorganization-Tax Considerations."
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<PAGE> 39
VOTING RIGHTS AND REQUIRED VOTE
Each Tax-Exempt Income Fund share is entitled to one vote. Approval of the
Proposal requires an affirmative Majority Shareholder Vote.
Shares of beneficial interest of Tax-Exempt Income Fund represented in
person or by proxy, including shares which abstain or do not vote with respect
to the Proposal, will be counted for purposes of determining whether a quorum is
present at the Meeting. Accordingly, an abstention from voting has the same
effect as a vote against the Proposal. However, if a broker or nominee holding
shares in "street name" indicates on the proxy card that it does not have
discretionary authority to vote on the Proposal, those shares will not be
considered as present and entitled to vote with respect to the Proposal.
Accordingly, a "broker non-vote" has no effect on the voting in determining
whether the Proposal has been adopted pursuant to clause (i) in the immediately
preceding paragraph, provided that the holders of more than 50% of the
outstanding shares (excluding the "broker non-votes") are present or
represented. However, for purposes of determining whether the Agreement has been
adopted pursuant to clause (ii) in the immediately preceding paragraph, a
"broker non-vote" has the same effect as a vote against the Proposal because
shares represented by a "broker non-vote" are considered to be outstanding
shares.
If the requisite approval of shareholders is not obtained, Tax-Exempt
Income Fund will continue to engage in business as a registered open-end,
management investment company and the Board of Trustees will consider what
further action may be appropriate.
CAPITALIZATION
(UNAUDITED)
The following table sets forth the capitalization of each Fund as of
December 31, 1995, and the pro forma combined capitalization of both Funds as
if the Reorganization had occurred on such date. The table reflects pro forma
exchange ratios of approximately 1.0314 Class A Tax-Free Bond Fund Shares being
issued for each Class A share of Tax-Exempt Income Fund and approximately
1.0312 Class B Tax-Free Bond Fund Shares being issued for each Class B share of
Tax-Exempt Income Fund. If the Reorganization is consummated, the actual
exchange ratios on the Closing Date may vary from the exchange ratios indicated
due to changes in the market value of the portfolio securities of both Tax-Free
Bond Fund and Tax-Exempt Income Fund between December 31, 1995 and the
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<PAGE> 40
Closing Date, changes in the amount of undistributed net investment
income and net realized capital gains of Tax-Free Bond Fund and Tax-Exempt
Income Fund during that period resulting from income and distributions, and
changes in the accrued liabilities of Tax Free Bond Fund and Tax-Exempt Income
Fund during the same period.
<TABLE>
<CAPTION>
Tax-Exempt Tax-Free Pro Forma
Income Fund Bond Fund Combined
----------- --------- ---------
<S> <C> <C> <C>
Net Assets
Class A $495,730,615 $118,797,313 $614,527,928
Class B 8,647,224 76,823,758 85,470,982
Net Asset Value
Per Share
Class A $ 11.00 $ 10.67 $ 10.67
Class B $ 11.00 $ 10.67 $ 10.67
Shares
Outstanding
Class A 45,056,903 11,137,117 57,611,315
Class B 786,183 7,202,812 8,013,555
</TABLE>
If the Reorganization had taken place on December 31, 1995, Tax-Exempt
Income Fund would have received 46,474,198 Class A shares and 810,743 Class B
shares of Tax-Free Bond Fund which would have been available for distribution to
shareholders of the applicable class of Tax-Exempt Income Fund. No assurance can
be given as to the number of Class A shares or Class B shares of Tax-Free Bond
Fund that will be received by Tax-Exempt Income Fund on the Closing Date. The
foregoing is merely an example of what Tax-Exempt Income Fund would have
received and distributed had the Reorganization been consummated on December 31,
1995, and should not be relied upon to reflect the amount that will actually be
received on the Closing Date.
COMPARATIVE PERFORMANCE INFORMATION
TOTAL RETURN
The average annual total return at public offering price on Tax-Exempt
Income Fund's Class A shares for the one-year, five-year and ten-year periods
ended December 31, 1995 was 11.33%, 7.28%, and 8.28%, respectively. The average
annual total return on Tax-Exempt Income Fund's Class B shares for the one-year
and life-of-class periods ended December 31, 1995 was 10.73% and 2.24%,
respectively. Total returns on Class B shares reflect the applicable contingent
deferred sales charge.
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<PAGE> 41
The average annual total return at public offering price on Tax-Free Bond
Fund's Class A shares for the one-year, five-year and life-of-class periods
ended December 31, 1995 was 14.79%, 8.84%, and 8.39%, respectively. The average
annual total return at public offering price on Tax-Free Bond Fund's Class B
shares for the one-year and life-of-class periods ended December 31, 1995 was
14.42% and 7.24%, respectively. Total returns on Class B shares reflect the
applicable contingent deferred sales charge.
The average annual total return of each class of the Funds is determined by
multiplying a hypothetical initial investment of $1,000 in a class by the
average annual compound rate of return (including capital
appreciation/depreciation, and dividends and distributions paid and reinvested)
attributable to that class for the stated period and annualizing the result.
The table below indicates the total return (capital changes plus
reinvestment of all dividends and distributions) on a hypothetical investment
of $1,000 in each class of each Fund covering the indicated periods ending
December 31, 1995. The data below represent historical performance which should
not be considered indicative of future performance of either Fund. Each Fund's
performance and net asset value will fluctuate such that shares, when redeemed,
may be worth more or less than their original cost.
-32-
<PAGE> 42
<TABLE>
<CAPTION>
VALUE OF A $1,000 INVESTMENT IN JOHN HANCOCK TAX-EXEMPT INCOME FUND
(UNAUDITED)
Value of
Investment on
Dec. 31, 1995 Total Return Total Return
Investment Amount of Including Including Sales Charge Excluding Sales Charge
Investment Period Date Investment Sales Charge Cumulative Annualized Cumulative Annualized
- ----------------- ---------- ---------- ------------- ----------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES:
1 year ended 12/31/95 12/31/94 $1,000 $1,114 11.35% 11.35% 16.60% 16.60%
5 years ended 12/31/95 12/31/90 $1,000 $1,421 42.08% 7.28% 48.79% 8.27%
10 years ended 12/31/95 12/31/85 $1,000 $2,216 121.64% 8.29% 132.12% 8.79%
CLASS B SHARES:
1 year ended 12/31/95 12/31/94 $1,000 $1,107 10.73% 10.73% 15.70% 15.70%
Life-of-Class ended 12/31/95 1/3/94 $1,000 $1,045 4.52% 2.24% 8.52% 4.19%
</TABLE>
<TABLE>
<CAPTION>
VALUE OF A $1,000 INVESTMENT IN JOHN HANCOCK TAX-FREE BOND FUND
(UNAUDITED)
Value of
Investment on
Dec. 31, 1995 Total Return Total Return
Investment Amount of Including Including Sales Charge Excluding Sales Charge
Investment Period Date Investment Sales Charge Cumulative Annualized Cumulative Annualized
- ----------------- ---------- ---------- ------------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
CLASS A SHARES:
1 year ended 12/31/95 12/31/94 $1,000 $1,148 14.79% 14.79% 20.20% 20.20%
5 years ended 12/31/95 12/31/90 $1,000 $1,527 52.69% 8.84% 59.94% 9.84%
Life-of-Class ended 12/31/95 1/5/90 $1,000 $1,620 62.00% 8.39% 69.61% 9.23%
CLASS B SHARES:
1 year ended 12/31/95 12/31/94 $1,000 $1,144 14.42% 14.42% 19.41% 19.41%
Life-of-Class ended 12/31/95 12/31/91 $1,000 $1,322 32.24% 7.24% 35.24% 7.84%
</TABLE>
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<PAGE> 43
YIELD AND EFFECTIVE YIELD
The following table shows the average yield and tax equivalent yield
achieved by each Fund for the thirty day period ended December 31, 1995. These
figures are computed in accordance with the SEC's standard formula.
<TABLE>
<CAPTION>
Average Yield Tax Equivalent Yield*
------------- --------------------
Thirty Days Ended Thirty days Ended
FUND December 31, 1995 December 31, 1995
- ---- ----------------- -----------------
<S> <C> <C>
Tax-Exempt Income Fund
Class A Shares 4.65% 7.70%
Class B Shares 4.17% 6.90%
Tax-Free
Bond Fund
Class A Shares 5.11% 8.46%
Class B Shares 4.61% 7.63%
</TABLE>
* Based on maximum federal tax rate of 39.6%.
BUSINESS OF TAX-EXEMPT INCOME FUND
GENERAL
For a discussion of the organization and operation of Tax-Exempt Income
Fund, see "Investment Objective and Policies" and "Organization and Management
of the Fund" in the Tax-Exempt Income Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of Tax-Exempt Income Fund's investment objective and
policies, see "Investment Objective and Policies" in the Tax-Exempt Income Fund
Prospectus.
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<PAGE> 44
TRUSTEES
For a discussion of the responsibilities of the Board of Trustees, see
"Organization and Management of the Fund" in the Tax-Exempt Income Fund
Prospectus.
INVESTMENT ADVISER AND DISTRIBUTOR
For a discussion regarding Tax-Exempt Income Fund's investment adviser and
distributor, see "Organization and Management of the Fund," "How to Buy Shares"
and "Share Price" in the Tax-Exempt Income Fund Prospectus.
EXPENSES
For a discussion of Tax-Exempt Income Fund's expenses, see "Expense
Information" and "The Fund's Expenses" in the Tax-Exempt Income Fund Prospectus.
CUSTODIAN AND TRANSFER AGENT
Tax-Exempt Income Fund's custodian is Investors Bank and Trust Company.
Tax-Exempt Income Fund's transfer agent is John Hancock Investor Services
Corporation.
TAX-EXEMPT INCOME FUND SHARES
For a discussion of Tax-Exempt Income Fund's shares of beneficial interest,
see "Organization and Management of the Fund" in the Tax-Exempt Income Fund
Prospectus.
PURCHASE OF TAX-EXEMPT INCOME FUND SHARES
For a discussion of how Class A and Class B shares of Tax-Exempt Income
Fund may be purchased or exchanged, see "How to Buy Shares" and "Additional
Services and Programs" in the Tax-Exempt Income Fund Prospectus. In anticipation
of the Reorganization, after the Record Date, no new accounts may be opened in
Tax-Exempt Income Fund. Existing shareholders of Tax-Exempt Income Fund may
continue to acquire shares of the Fund after the Record Date by direct purchase,
through a monthly automatic accumulation plan and through reinvestment of
dividends and distributions.
REDEMPTION OF TAX-EXEMPT INCOME FUND SHARES
For a discussion of how Class A and Class B shares of Tax-Exempt Income
Fund may be redeemed (other than in the Reorganization), see "How to Redeem
Shares" in the Tax-Exempt Income Fund Prospectus. Tax-Exempt Income Fund
shareholders whose shares are represented by share certificates will be required
to surrender their certificates for cancellation or deliver an affidavit of loss
-36-
<PAGE> 45
accompanied by an adequate surety bond to Investor Services in order to redeem
Tax-Free Bond Fund Shares received in the Reorganization.
DIVIDENDS, DISTRIBUTIONS AND TAXES
For a discussion of Tax-Exempt Income Fund's policy with respect to
dividends, distributions and taxes, see "Dividends and Taxes" in the Tax-Exempt
Income Fund Prospectus.
BUSINESS OF TAX-FREE BOND FUND
For a discussion of the organization and current operation of Tax-Free Bond
Fund, see "Investment Objective and Policies" and "Organization and Management
of the Fund" in the Tax-Free Bond Fund Prospectus.
INVESTMENT OBJECTIVE AND POLICIES
For a discussion of Tax-Free Bond Fund's investment objective and policies,
see "Investment Objective and Policies" in the Tax-Free Bond Fund Prospectus.
TRUSTEES
For a discussion of the responsibilities of the Board of Trustees, see
"Organization and Management of the Fund" in the Tax-Free Bond Fund Prospectus.
INVESTMENT ADVISER AND DISTRIBUTOR
For a discussion regarding Tax-Free Bond Fund's investment adviser and
distributor, see "Organization and Management of the Fund," "How to Buy Shares"
and "Share Price" in the Tax-Free Bond Fund Prospectus.
EXPENSES
For a discussion of Tax-Free Bond Fund's expenses, see "Expense
Information" and "The Fund's Expenses" in the Tax-Free Bond Fund Prospectus.
CUSTODIAN AND TRANSFER AGENT
Tax-Free Bond Fund's custodian is Investors Bank and Trust Company.
Tax-Free Bond Fund's transfer agent is John Hancock Investor Services
Corporation.
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<PAGE> 46
TAX-FREE BOND FUND SHARES
For a discussion of Tax-Free Bond Fund Shares, see "Organization and
Management of the Fund" in the Tax-Free Bond Fund Prospectus.
PURCHASE OF TAX-FREE BOND FUND SHARES
For a discussion of how Class A and Class B shares of Tax-Free Bond Fund
may be purchased or exchanged, see "How to Buy Shares" and "Additional Services
and Programs" in the Tax-Free Bond Fund Prospectus.
REDEMPTION OF TAX-FREE BOND FUND SHARES
For a discussion of how Class A and Class B shares of Tax-Free Bond Fund
may be redeemed, see "How to Redeem Shares" in the Tax-Free Bond Fund
Prospectus. Former shareholders of Tax-Exempt Income Fund whose shares are
represented by share certificates will be required to surrender their
certificates for cancellation or deliver an affidavit of loss accompanied by an
adequate surety bond to Investor Services in order to redeem Tax-Free Bond Fund
Shares received in the Reorganization.
DIVIDENDS, DISTRIBUTIONS AND TAXES
For a discussion of Tax-Free Bond Fund's policy with respect to dividends,
distributions and taxes, see "Dividends and Taxes" in the Tax-Free Bond Fund
Prospectus.
EXPERTS
The respective financial statements and the financial highlights of
Tax-Free Bond Fund and Tax-Exempt Income Fund as of December 31, 1995 and for
the year then ended, incorporated by reference into the Proxy Statement and
Prospectus, have been audited by Ernst & Young LLP, independent auditors, as set
forth in their reports thereon appearing in the Statement of Additional
Information, and are included in reliance upon such reports given upon the
authority of such firm as experts in accounting and auditing.
AVAILABLE INFORMATION
Each Fund is subject to the informational requirements of the Securities
Exchange Act of 1934 and the Investment Company Act, and in accordance therewith
files reports, proxy statements and other information with the SEC. These
reports, proxy statements and other information filed by Tax-Exempt Income Fund
and Tax-Free Bond Fund, can be inspected and copied (at prescribed rates) at the
public reference facilities of the SEC at 450 Fifth Street, N.W., Washington,
D.C., and at the following regional office:
-38-
<PAGE> 47
New York (7 World Trade Center, Suite 1300, New York, New York). Copies
of such material can also be obtained by mail from the Public Reference Section
of the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates.
-39-
<PAGE> 48
EXHIBIT A
JOHN HANCOCK TAX-FREE BOND FUND, MAY 1, 1995
SUPPLEMENT TO CLASS A AND CLASS B PROSPECTUS
The "INVESTMENT OBJECTIVE AND POLICIES" section is amended as follows:
The Fund may invest up to 35% of its assets in municipal bonds and notes
rated, at time of purchase, Ba, B by Moody's Investors Services, Inc., BB, B by
Standard and Poor's Rating Group or Fitch or, if not rated, determined by the
John Hancock Advisers, Inc. (the "Adviser") to be of comparable credit
quality. These bonds are considered speculative and are generally referred to
as junk bonds. While generally providing greater income than investments and in
higher quality securities, these bonds involve greater risk of principal and
income loss, including the possibility of default. These bonds may have greater
price volatility, especially during periods of economic uncertainty or change.
Bonds rated B are currently meeting debt services requirements but provide a
limited margin of safety and are vulnerable to default in the event of adverse
business, financial or economic conditions. In addition, the market for these
bonds may be less liquid than the market for higher rated securities.
Therefore, the Adviser's judgment at times play a greater role in the
performance and valuation of the Fund's investments in these bonds.
"THE FUND'S EXPENSES" section is amended as follows:
The Trustees of the Fund have voted to recommend that the Class A shareholders
of the Fund approve an increase in the Rule 12b-1 fee for Class A shares of the
Fund from 0.15% of average daily net assets to 0.25% of average daily net
assets effective at the end of 1996. Also at the end of 1996, the Distributor
will remove its Rule 12b-1 fee reduction on Class B shares Rule 12b-1 plan so
that the fee increases from 0.90% of average daily net assets to 1.00% of
average daily net assets.
November 28, 1995
The "ORGANIZATION AND MANAGEMENT OF THE FUND" section is amended as follows:
Thomas C. Goggins is Senior Vice President of the Adviser and portfolio manager
of the Fund. Mr. Goggins heads up John Hancock's team of municipal managers and
analysts. he joined the Adviser in 1995. Previously to that date, Mr. Goggins
was a municipal bond portfolio manager at Putnam Investments and Transamerica
Investment Services, Inc.
January 15, 1996
5200S 1/96a
<PAGE> 49
JOHN HANCOCK
TAX-FREE
BOND FUND
CLASS A AND CLASS B SHARES
PROSPECTUS
MAY 1, 1995
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Expense Information................................................................... 2
The Fund's Financial Highlights....................................................... 3
Investment Objective and Policies..................................................... 4
Organization and Management of the Fund............................................... 7
Alternative Purchase Arrangements..................................................... 7
The Fund's Expenses................................................................... 9
Dividends and Taxes................................................................... 10
Performance........................................................................... 11
How to Buy Shares..................................................................... 13
Share Price........................................................................... 14
How to Redeem Shares.................................................................. 20
Additional Services and Programs...................................................... 23
Investments, Techniques and Risk Factors.............................................. 26
Derivative Instruments................................................................ 28
</TABLE>
This Prospectus sets forth the information about John Hancock Tax-Free Bond
Fund (the "Fund"), a diversified fund, that you should know before investing.
Please read and retain it for future reference.
Additional information about the Fund has been filed with the Securities and
Exchange Commission (the "SEC"). You can obtain a copy of the Fund's Statement
of Additional Information, dated May 1, 1995 and incorporated by reference into
this Prospectus, free of charge by writing or telephoning: John Hancock Investor
Services Corporation, P.O. Box 9116, Boston, Massachusetts 02205-9116,
1-800-225-5291 (1-800-554-6713 TDD).
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD OR ANY OTHER GOVERNMENT
AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 50
EXPENSE INFORMATION
The purpose of the following information is to help you to understand the
various fees and expenses you will bear, directly or indirectly, when you
purchase Fund shares. The operating expenses included in the table and
hypothetical example below are based on fees and expenses for the Fund's fiscal
year ended December 31, 1994 adjusted to reflect certain current expenses.
Actual fees and expenses in the future of Class A and Class B shares may be
greater or less than those indicated.
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchase (as a percentage of offering price).................... 4.50% None
Maximum sales charge imposed on reinvested dividends............................................ None None
Maximum deferred sales charge................................................................... None* 5.00%
Redemption fee+................................................................................. None None
Exchange fee.................................................................................... None None
ANNUAL FUND OPERATING EXPENSES (As a percentage of average net assets)
Management fee.................................................................................. 0.55% 0.55%
12b-1 fee (net of limitation -- Class B shares)***.............................................. 0.15% 0.90%
Other expenses**................................................................................ 0.26% 0.26%
Less fee waiver and expense limitation by Adviser............................................... (0.11)% (0.11)%
Total Fund operating expenses (net of limitation)****........................................... 0.85% 1.60%
</TABLE>
- ---------------
* No sales charge is payable at the time of purchase on investments of $1
million or more, but for these investments a contingent deferred sales
charge may be imposed, as described below under the caption "Share Price,"
in the event of certain redemption transactions within one year of
purchase.
**Other Expenses include transfer agent, legal, audit, custody and other
expenses.
*** The amount of the 12b-1 fee for Class B Shares used to cover service
expenses will be up to 0.25% of the Fund's average net assets, and the
remaining portion will be used to cover distribution expenses.
****Total Fund operating expenses in the table reflect voluntary and temporary
limitations by the Fund's investment adviser and distributor. Without such
limitations these Total Fund Operating Expenses of Class A shares and Class
B shares would be 0.96% and 1.81%, respectively.
+ Redemption by wire fee (currently $4.00) not included.
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
------ ------- ------- --------
<S> <C> <C> <C> <C>
You would pay the following expenses for the indicated period of years on a
hypothetical $1,000 investment, assuming 5% annual return:
Class A Shares............................................................... $ 53 $71 $ 90 $145
Class B Shares
-- Assuming complete redemption at end of period......................... $ 66 $80 $ 107 $170
-- Assuming no redemption................................................ $ 16 $50 $ 87 $170
</TABLE>
(This example should not be considered a representation of past or future
expenses. Actual expenses may be greater or lesser than those shown.)
The Fund's payment of a distribution fee may result in a long-term shareholder
indirectly paying more than the economic equivalent of the maximum front-end
sales charge permitted under the National Association of Securities Dealers,
Inc.'s Rules of Fair Practice.
The management and 12b-1 fees referred to above are more fully explained in
this Prospectus under the caption "The Fund's Expenses" and in the Statement of
Additional Information under the captions "Investment Advisory and Other
Services" and "Purchase of Shares."
2
<PAGE> 51
THE FUND'S FINANCIAL HIGHLIGHTS
The following table of financial highlights has been audited by Ernst & Young
LLP, the Fund's independent auditors, whose unqualified report is included in
the Statement of Additional Information. Further information about the
performance of the Fund is contained in the Fund's Annual Report to Shareholders
which may be obtained free of charge by writing or telephoning John Hancock
Investor Services Corporation ("Investor Services"), at the address or telephone
number listed on the front page of this Prospectus.
Selected data for each class of shares outstanding throughout each period is
as follows:
<TABLE>
<CAPTION>
CLASS A SHARES CLASS B SHARES
------------------------------------------------------- ------------------------------
YEAR ENDED DECEMBER 31, PERIOD ENDED YEAR ENDED DECEMBER 31,
---------------------------------------- DECEMBER 31, ------------------------------
1994(1) 1993 1992 1991 1990(2) 1994(1) 1993 1992(3)
------- ------ ------ ------ ------------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Per share income and capital changes
for a share outstanding during each
period:
Net asset value, beginning of
period............................. $10.96 $10.47 $10.24 $9.90 $10.00 $10.96 $10.47 $10.24
INCOME FROM INVESTMENT OPERATIONS
Net investment income................ 0.58 0.62 0.67 0.69 0.71 0.50 0.54 0.59
Net realized and unrealized gain
(loss)
on investments..................... (1.58 ) 0.93 0.42 0.72 (0.13) (1.58 ) 0.93 0.42
------- ------ ------ ------ ------ ------- ------ -------
Total from Investment Operations..... (1.00 ) 1.55 1.09 1.41 0.58 (1.08 ) 1.47 1.01
LESS DISTRIBUTIONS
Dividends from net investment
income............................. (0.57 ) (0.62) (0.68) (0.68) (0.68) (0.50 ) (0.54) (0.60 )
Distributions from realized gains.... -- (0.44) (0.18) (0.39) -- -- (0.44) (0.18 )
------- ------ ------ ------ ------ ------- ------ -------
Total Distributions.................. (0.57 ) (1.06) (0.86) (1.07) (0.68) (0.50 ) (0.98) (0.78 )
------- ------ ------ ------ ------ ------- ------ -------
Net asset value, end of period....... $ 9.39 $10.96 $10.47 $10.24 $ 9.90 $ 9.38 $10.96 $10.47
======= ====== ====== ====== ============= ======= ====== =======
Total Return(4)...................... (9.28 )% 15.15% 10.97% 14.78% 6.04% (10.05 )% 14.30% 10.15%
======= ====== ====== ====== ============= ======= ====== =======
RATIOS AND SUPPLEMENTAL DATA
Ratio of expenses to average net
assets............................. 0.96% 0.95% 0.96% 0.98% 1.25% 1.71% 1.70% 1.73%
Ratio of expense reimbursement to
average
net assets......................... (0.11 )% (0.17)% (0.30)% (0.38)% (0.85)% (0.11 )% (0.17)% (0.30 )%
======= ====== ====== ====== ============= ======= ====== =======
Ratio of net expenses to average
net assets......................... 0.85% 0.78% 0.66% 0.60% 0.40% 1.60% 1.53% 1.43%
======= ====== ====== ====== ============= ======= ====== =======
Ratio of net investment income to
average net assets................. 5.72% 5.57% 6.46% 6.86% 7.09% 4.97% 4.66% 5.57%
Portfolio turnover................... 107% 116% 79% 123% 64% 107% 116% 79%
Net Assets, end of period (in
thousands)......................... $114,539 $136,521 $99,523 $73,393 $45,437 $70,243 $56,384 $18,272
</TABLE>
- ---------------
(1) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser. Prior to this date, Transamerica Fund Management Company was the
investment adviser.
(2) Financial highlights, including total return, are for the period from
January 5, 1990 (date of Fund's initial offering of shares to the public) to
December 31, 1990 and have not been annualized.
(3) Per share information has been calculated using the average number of shares
outstanding.
(4) Total return does not include the effect of the initial sales charge for
Class A Shares nor the contingent deferred sales charge for Class B Shares.
Total return does include the benefit of a voluntary expense reimbursement
by the Investment Adviser. Without such benefit, the total return would be
lower.
3
<PAGE> 52
INVESTMENT OBJECTIVE AND POLICIES
The Fund's investment objective is to obtain as high a level of interest income
exempt from federal income taxes as is consistent with preservation of capital.
The Fund seeks to achieve its objective by investing primarily in municipal
bonds, notes and commercial paper, the interest on which is exempt from federal
income taxes ("Municipal Obligations"). Municipal Obligations include debt
obligations issued by or on behalf of states, territories and possessions of the
United States; the District of Columbia; and the political subdivisions,
agencies or instrumentalities thereof.
- -------------------------------------------------------------------------------
THE FUND SEEKS TO PROVIDE INCOME EXEMPT
FROM FEDERAL INCOME TAX.
- -------------------------------------------------------------------------------
Under normal market conditions, at least 80% of the Fund's total assets will be
invested in Municipal Obligations. At least 65% of the Fund's assets will
normally be invested in municipal bonds. Pending the investment of Fund assets
in Municipal Obligations and to meet redemption requests, the Fund may invest up
to 20% of its total assets in private activity bonds (the interest on which may
be treated as a tax preference item under the Federal alternative minimum tax)
and in certain taxable money market securities, including: obligations issued or
guaranteed by the U.S. government, its agencies, instrumentalities or
authorities; corporate debt securities; commercial paper; certificates of
deposit of domestic banks with assets of $1 billion or more; and repurchase
agreements secured by U.S. Government securities.
When John Hancock Advisers, Inc. (the "Adviser") determines that unfavorable
investment conditions warrant a temporary defensive position, the Fund may
invest more than 20% of its assets in taxable money market securities rated in
the three highest ratings as determined by Moody's Investors Services, Inc.
("Moody's"), Standard & Poor's Ratings Group ("S&P") or Fitch Investors Service
("Fitch") or, if unrated, determined by the Adviser to be of comparable quality.
See the Statement of Additional Information for a description of those ratings.
Municipal bonds generally are classified as either general obligation bonds or
revenue bonds. General obligation bonds are backed by the credit of an issuer
having taxing power and are payable from the issuer's general unrestricted
revenues. Their payment may depend on an appropriation of the issuer's
legislative body. Revenue bonds, by contrast, are payable only from the revenues
derived from a particular project, facility or a specific revenue source. They
are not generally payable from the unrestricted revenues of the issuer.
Municipal notes include tax anticipation notes, bond anticipation notes, revenue
anticipation notes and project notes. Municipal commercial paper obligations are
unsecured promissory notes issued by municipalities to meet short-term credit
needs.
- -------------------------------------------------------------------------------
THE FUND'S INVESTMENT IN MUNICIPAL
OBLIGATIONS INCLUDES MUNICIPAL BONDS,
MUNICIPAL NOTES AND MUNICIPAL COMMERCIAL
PAPER.
- -------------------------------------------------------------------------------
At the time of purchase, municipal bonds including private activity bonds must
be rated at least investment grade, i.e., Baa by Moody's, BBB by S&P or Fitch
or, if not rated, determined by the Adviser to be of comparable credit quality.
Municipal notes must be rated at least Aa by Moody's or AA by S&P or Fitch or,
if not rated, determined by the Adviser to be of comparable credit quality.
Municipal commercial paper must be rated at least Prime-2 by Moody's or A-1+ by
S&P. The Fund may retain Municipal Obligations whose ratings are downgraded
below permissible ratings until the Adviser determines that disposing of such
Obligations is in the best interest of the Fund. Municipal bonds rated BBB or
Baa are considered to have some speculative characteristics and can pose special
risks involving the ability of the issuer to make payment of principal and
interest to a greater extent than higher rated securities. See Appendix A to the
Statement of Additional Information for additional discussion of the ratings
assigned to Municipal Obligations.
- -------------------------------------------------------------------------------
THE FUND INVESTS IN MUNICIPAL OBLIGATIONS.
- -------------------------------------------------------------------------------
4
<PAGE> 53
The Adviser will purchase municipal bonds rated BBB or Baa where, based upon
price, yield and its assessment of quality, investment in such bonds is
determined to be consistent with the Fund's objective of preservation of
capital. The Adviser will evaluate and monitor the quality of all investments,
including bonds rated BBB or Baa, and will dispose of such bonds necessary to
assure that the Fund's overall portfolio is constituted in manner consistent
with the goal of preservation of capital. To the extent that the Fund's
investments in municipal bonds rated BBB or Baa includes obligations believed to
be consistent with the goal of preserving capital, such bonds may not provide
yields as high as those of other obligations having such ratings and the
differential in yields between such bonds and obligations with higher quality
ratings may not be as significant as might otherwise be generally available.
Because there is no restriction on the maturities of the Municipal Obligations
in which the Fund may invest, the Fund's average portfolio maturity is not
subject to any limit. Generally, the longer the average portfolio maturity, the
greater will be the impact of fluctuations in interest rates on the values of
the Fund's assets and on the net asset value per share.
- -------------------------------------------------------------------------------
THERE IS NO RESTRICTION ON THE MATURITIES
OF THE FUND'S MUNICIPAL OBLIGATIONS.
- -------------------------------------------------------------------------------
The Fund may write (sell) covered call and put options on debt securities in
which it may invest and on indices composed of debt securities in which it may
invest. The Fund may purchase call and put options on these securities and
indices. The Fund may also write straddles, which are combinations of put and
call options on the same security. The Fund may buy and sell interest rate and
municipal bond index futures contracts and options on such futures contracts to
hedge against changes in securities prices and interest rates.
- -------------------------------------------------------------------------------
THE FUND MAY EMPLOY CERTAIN INVESTMENT
STRATEGIES TO HELP ACHIEVE ITS INVESTMENT
OBJECTIVE.
- -------------------------------------------------------------------------------
The Fund may invest in variable rate and floating rate obligations, including
inverse floating rate obligations, on which the interest rate is adjusted at
predesignated periodic intervals or when there is a change in the market rate of
interest on which the interest rate payable on the obligation is met is based.
Options, futures contracts and variable and floating rate instruments are
generally considered to be "derivative" instruments because they derive their
value from the performance of an underlying asset, index or other economic
benchmark. See "Investments, Techniques and Risk Factors" for additional
discussion of derivative instruments.
The Fund will not concentrate in any one industry (governmental issuers are not
considered to be part of any "industry"). While the Fund may invest more than
25% of its total assets in industrial development or pollution control bonds, it
may
5
<PAGE> 54
not invest more than 25% of its assets in industrial development or pollution
control bonds which are dependent, directly or indirectly, on the revenues or
credit of private entities in any one industry.
The Fund may purchase tax exempt participation interests and municipal lease
obligations, may lend its portfolio securities, enter into repurchase
agreements, purchase restricted and illiquid securities and purchase securities
on a when-issued or forward commitment basis.
See "Investments, Techniques and Risk Factors" for more information about the
Fund's investments.
The Fund has adopted certain investment restrictions which are enumerated in
detail in the Statement of Additional Information where they are classified as
fundamental or nonfundamental. Those restrictions designated as fundamental may
not be changed without shareholder approval. The Fund's investment objective and
its policy to invest (under normal market conditions) 80% of its assets in
Municipal Obligations are fundamental and may not be changed without the
approval of the Fund's shareholders. The Fund's other investment policies and
its nonfundamental restrictions, however, may be changed by a vote of the
Trustees without shareholder approval. Notwithstanding the Fund's fundamental
investment restriction prohibiting investments in other investment companies,
the Fund may, pursuant to an order granted by the SEC, invest in other
investment companies in connection with a deferred compensation plan for the
non-interested trustees of the John Hancock Group of Funds. There can be no
assurance that the Fund will achieve its investment objective.
- -------------------------------------------------------------------------------
THE FUND FOLLOWS CERTAIN POLICIES WHICH
MAY HELP TO REDUCE INVESTMENT RISK.
- -------------------------------------------------------------------------------
RISK FACTORS. An investment in the Fund is intended for long-term investors who
can accept the risks associated with investing primarily in fixed-income
securities. The Fund's investments will be subject to market fluctuation and
other risks inherent in all securities. The yield, return and price volatility
of the Fund depend on the type and quality of its investments as well as market
and other factors. In addition, the Fund's potential investments and management
techniques may entail specific risks. For additional information about risks
associated with an investment in the Fund, see "Investments, Techniques and Risk
Factors."
The primary consideration in choosing brokerage firms to carry out the Fund's
transactions is execution at the most favorable prices, taking into account the
broker's professional ability and quality service. Consideration may also be
given to the broker's sales of Fund shares. Pursuant to procedures determined by
the Trustees, the Adviser may place securities transactions with brokers
affiliated with the Adviser. The brokers include Tucker Anthony Incorporated,
Sutro and Company, Inc. and John Hancock Distributors, Inc., which are
indirectly owned by the John Hancock Mutual Life Insurance Company (the "Life
Company"), which in turn indirectly owns the Adviser.
- -------------------------------------------------------------------------------
BROKERS ARE CHOSEN ON BEST PRICE AND
EXECUTION.
- -------------------------------------------------------------------------------
6
<PAGE> 55
ORGANIZATION AND MANAGEMENT OF THE FUND
The Fund is a diversified open-end management investment company organized as a
Massachusetts business trust in 1989. The Fund reserves the right to create and
issue a number of series of shares, or funds or classes thereof, which are
separately managed and have different investment objectives. The Fund is not
required to and does not intend to hold annual meetings of shareholders,
although special meetings may be held for such purposes as electing or removing
Trustees, changing fundamental policies or approving a management contract. The
Fund, under certain circumstances, will assist in shareholder communications
with other shareholders.
- -------------------------------------------------------------------------------
THE TRUSTEES ELECT OFFICERS AND RETAIN THE
INVESTMENT ADVISER WHO IS RESPONSIBLE FOR
THE DAY-TO-DAY OPERATIONS OF THE FUND,
SUBJECT TO THE TRUSTEES' POLICIES AND
SUPERVISION.
- -------------------------------------------------------------------------------
The Adviser was organized in 1968 and is a wholly-owned indirect subsidiary of
the Life Company, a financial services company. The Adviser provides the Fund,
and other investment companies in the John Hancock group of funds, with
investment research and portfolio management services. John Hancock Funds
distributes shares for all of the John Hancock mutual funds through Selling
Brokers. Certain Fund officers are also officers of the Adviser and John Hancock
Funds.
- -------------------------------------------------------------------------------
JOHN HANCOCK ADVISERS, INC. ADVISES
INVESTMENT COMPANIES HAVING A TOTAL ASSET
VALUE OF MORE THAN $13 BILLION.
- -------------------------------------------------------------------------------
All investment decisions are made by the Adviser's fixed-income portfolio
management team and no single person is primarily responsible for making
recommendations to the team.
In order to avoid any conflict with portfolio trades for the Fund, the Adviser
and the Fund have adopted extensive restrictions on personal securities trading
by personnel of the Adviser and its affiliates. Some of these restrictions are:
preclearance for all personal trades and a ban on the purchase of initial public
offerings, as well as contributions to specified charities of profits on
securities held for less than 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
ALTERNATIVE PURCHASE ARRANGEMENTS
You can purchase shares of the Fund at a price equal to their net asset value
per share plus a sales charge. At your election, this charge may be imposed
either at the time of the purchase (see "Initial Sales Charge Alternative,"
Class A shares) or on a contingent deferred basis (the "Contingent Deferred
Sales Charge Alternative," Class B shares). If you do not specify on your
account application the class of shares you are purchasing, it will be assumed
that you are investing in Class A shares.
- -------------------------------------------------------------------------------
AN ALTERNATIVE PURCHASE PLAN ALLOWS YOU TO
CHOOSE THE METHOD OF PAYMENT THAT IS BEST
FOR YOU.
- -------------------------------------------------------------------------------
CLASS A SHARES. If you elect to purchase Class A shares, you will incur an
initial sales charge unless the amount of your purchase is $1 million or more.
If you purchase $1 million or more of Class A shares, you will not be subject to
an initial sales charge, but you will incur a sales charge if you redeem your
shares within one year of purchase. Class A shares are subject to ongoing
distribution and service fees at a combined annual rate of up to 0.25% of the
Fund's average daily net assets attributable to the Class A shares. Certain
purchases of Class A shares qualify for reduced initial sales charges. See
"Share Price -- Qualifying for a Reduced Sales Charge."
- -------------------------------------------------------------------------------
INVESTMENTS IN CLASS A SHARES ARE SUBJECT
TO AN INITIAL SALES CHARGE.
- -------------------------------------------------------------------------------
7
<PAGE> 56
CLASS B SHARES. You will not incur a sales charge when you purchase Class B
shares, but the shares are subject to a sales charge if you redeem them within
six years of purchase (the "contingent deferred sales charge" or the "CDSC").
Class B shares are subject to ongoing distribution and service fees at a
combined annual rate of up to 1.00% of the Fund's average daily net assets
attributable to the Class B shares. Investing in Class B shares permits all of
your dollars to work from the time you make your investment, but the higher
ongoing distribution fee will cause these shares to have higher expenses than
those of Class A shares. To the extent that any dividends are paid by the Fund,
these higher expenses will also result in lower dividends than those paid on
Class A shares.
- -------------------------------------------------------------------------------
INVESTMENTS IN CLASS B SHARES ARE SUBJECT
TO A CONTINGENT DEFERRED SALES CHARGE.
- -------------------------------------------------------------------------------
Class B shares are not available for fullservice defined contribution plans
administered by Investor Services or the Life Company that had more than 100
eligible employees at the inception of the Fund account.
FACTORS TO CONSIDER IN CHOOSING AN ALTERNATIVE. The alternative purchase
arrangement allows you to choose the most beneficial way to buy shares, given
the amount of your purchase, the length of time you expect to hold your shares
and other circumstances. You should consider whether, during the anticipated
life of your Fund investment, the CDSC and accumulated fees on Class B shares
would be less than the initial sales charge and accumulated fees on Class A
shares purchased at the same time, and to what extent this differential would be
offset by the Class A shares' lower expenses. To help you make this
determination, the table under the caption "Expense Information" on the inside
cover page of this Prospectus shows examples of the charges applicable to each
class of shares. Class A shares will normally be more beneficial if you qualify
for reduced sales charges. See "Share Price--Qualifying for a Reduced Sales
Charge."
- -------------------------------------------------------------------------------
YOU SHOULD CONSIDER WHICH CLASS OF SHARES
WOULD BE MORE BENEFICIAL TO YOU.
- -------------------------------------------------------------------------------
Class A shares are subject to lower distribution fees and, accordingly, pay
correspondingly higher dividends per share, to the extent any dividends are
paid. However, because initial sales charges are deducted at the time of
purchase, you would not have all of your funds invested initially and,
therefore, would initially own fewer shares. If you do not qualify for reduced
initial sales charges and expect to maintain your investment for an extended
period of time, you might consider purchasing Class A shares. This is because
the accumulated distribution and service charges on Class B shares may exceed
the initial sales charge and accumulated distribution and service charges on
Class A shares during the life of your investment.
Alternatively, you might determine that it is more advantageous to purchase
Class B shares to have all of your funds invested initially. However, you will
be subject to higher distribution and service fees and, for a six-year period, a
CDSC.
In the case of Class A shares, the distribution expenses that John Hancock
Funds, Inc. ("John Hancock Funds") incurs in connection with the sale of the
shares will be paid from the proceeds of the initial sales charge and ongoing
distribution and service fees. In the case of Class B shares, the expenses will
be paid from the
8
<PAGE> 57
proceeds of the ongoing distribution and service fees, as well as from the CDSC
incurred upon redemption within six years of purchase. The purpose and function
of the Class B shares' CDSC and ongoing distribution and service fees are the
same as those of the Class A shares' initial sales charge and ongoing
distribution and service fees. Sales personnel distributing the Fund's shares
may receive different compensation for selling each class of shares.
Dividends, if any, on Class A and Class B shares will be calculated in the same
manner, at the same time and on the same day. They also will be in the same
amount, except for differences resulting from each class bearing only its own
distribution and service fees, shareholder meeting expenses and any incremental
transfer agency costs. See "Dividends and Taxes."
THE FUND'S EXPENSES
For managing its investment and business affairs, the Fund pays a monthly fee to
the Adviser equal to 0.55% of the Fund's average daily net assets. During the
Fund's most recent fiscal year, the advisory fee was 0.44% of the Fund's average
daily net assets. The Adviser has voluntarily and temporarily agreed to continue
to limit the Fund's operating expenses and not to impose its management fee to
the extent necessary to limit the total of the Fund's management fees and
operating expenses (not including fees payable by the Fund under a Rule 12b-1
plan) to .70% of the average net assets attributable to Class A and Class B
shares.
The Class A and Class B shareholders have adopted distribution plans (each a
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940 (the
"1940 Act"). Under these Plans, the Fund will pay distribution and service fees
at an aggregate annual rate of up to 0.15% of the Class A shares' average daily
net assets and an aggregate annual rate of 1.00% of the Class B shares' average
daily net assets. John Hancock Funds has temporarily agreed to limit the
distribution and services fees pursuant to the Class B Plan to 0.90% of average
daily net assets. Up to 0.25% for Class B shares and 0.15% for Class A shares is
for service expenses and the remaining amount is for distribution expenses. The
distribution fees will be used to reimburse John Hancock Funds for its
distribution expenses, including but not limited to: (i) initial and ongoing
sales compensation to Selling Brokers and others (including affiliates of John
Hancock Funds) engaged in the sale of Fund shares; (ii) marketing, promotional
and overhead expenses incurred in connection with the distribution of Fund
shares; (iii) unreimbursed distribution expenses under the Fund's prior
distribution plans; (iv) distribution expenses incurred by other investment
companies which sell all or substantially all of its assets to, merge or
otherwise engage in a reorganization transaction with the Fund; and (v) with
respect to Class B shares only, interest expenses on unreimbursed distribution
expenses. The service fees will be used to compensate Selling Brokers for
providing personal and account maintenance services to shareholders.
- -------------------------------------------------------------------------------
THE FUND PAYS DISTRIBUTION AND SERVICE
FEES FOR MARKETING AND SALES-RELATED
SHAREHOLDER SERVICING.
- -------------------------------------------------------------------------------
In the event John Hancock Funds is not fully reimbursed for payments it makes or
expenses it incurs under the Class A Plan, these expenses will not be carried
beyond one year from the date they were incurred. Unreimbursed expenses under
the Class B Plan will be carried forward together with interest on the balance
of
9
<PAGE> 58
these unreimbursed expenses. For the fiscal year ended December 31, 1994, an
aggregate of $3,316,138 of distribution expenses or 4.72% of the average net
assets of the Fund's Class B shares was not reimbursed or recommended by John
Hancock Funds through receipt of deferred sales charges or Rule 12b-1 fees in
prior periods.
Information on the Fund's total expenses is in the Financial Highlights section
of this Prospectus.
DIVIDENDS AND TAXES
DIVIDENDS. The Fund generally declares dividends daily and distributes
dividends monthly, representing all or substantially all of its net investment
income. The Fund will distribute net realized long-term and short-term capital
gains, if any, annually before the close of the fiscal year (December 31).
- -------------------------------------------------------------------------------
YOU SHOULD KEEP YOUR ACCOUNT STATEMENTS
RECEIVED BY THE FUND FOR YOUR PERSONAL TAX
RECORDS.
- -------------------------------------------------------------------------------
Dividends are reinvested in additional shares of your class unless you elect the
option to receive them in cash. If you elect the cash option and the U.S. Postal
Service cannot deliver your checks, your election will be converted to the
reinvestment option. Because of the higher expenses associated with Class B
shares, any dividends on these shares will be lower than those on the Class A
shares. See "Share Price."
TAXATION. The Fund intends to meet certain federal tax requirements so that its
distributions of the tax-exempt interest it earns may be treated as
"exempt-interest dividends," which you are entitled to treat as tax-exempt
interest. That portion of exempt-interest dividends, if any, attributable to
interest on certain tax-exempt obligations that are "private activity bonds" may
increase certain shareholders' alternative minimum tax.
Shareholders receiving social security benefits and certain railroad retirement
benefits may be subject to Federal income tax on up to 85 percent of such
benefits as a result of receiving investment income, including tax-exempt income
(such as exempt-interest dividends) and other dividends paid by the Fund. Shares
of the Fund may not be an appropriate investment for persons who are
"substantial users" of facilities financed by industrial development or private
activity bonds, or persons related to "substantial users." Consult your tax
adviser if you think this may apply to you.
Dividends from the Fund's net taxable income, if any, including any market
discount included in the Fund's income, and from the Fund's net short-term
capital gains are taxable to you as ordinary income. Dividends from the Fund's
net long-term capital gains are taxable as long-term capital gain. These
dividends are taxable, whether received in cash or reinvested in additional
shares. Certain dividends may be paid by the Fund in January of a given year but
may be treated as if you received them the previous December.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). As a regulated investment company, the Fund will not be
subject to
10
<PAGE> 59
Federal income tax on any net investment income or net realized capital gains
distributed to its shareholders within the time period prescribed by the Code.
When you redeem (sell) or exchange shares, you may realize a taxable gain or
loss.
On the account application you must certify that your social security or other
tax payer identification number is correct and that you are not subject to
backup withholding of Federal income tax. If you do not provide this information
or are otherwise subject to this withholding, the Fund may be required to
withhold 31% of your taxable dividends, and 31% of the proceeds of redemptions
or exchanges.
In addition to Federal taxes, you may be subject to state and local taxes with
respect to your investment in and distributions from the Fund. A state income
(and possibly local income and/or intangible property) tax exemption is
generally available to the extent the Fund's distributions are derived from
interest on (or, in the case of intangibles taxes, the value of its assets is
attributable to) certain U.S. Government obligations and/or tax-exempt municipal
obligations issued by or on behalf of the particular state or a political
subdivision thereof, provided in some states that certain thresholds for
holdings of such obligations and/or reporting requirements are satisfied. You
will receive tax information each year showing the percentage of the Fund's
exempt-interest dividends attributable to each state. You should consult your
tax adviser for specific advice.
PERFORMANCE
Yield reflects the Fund's rate of income on portfolio investments as a
percentage of its share price. Yield is computed by annualizing the result of
dividing the net investment income per share over a 30 day period by the maximum
offering price per share on the last day of that period. Yield is also
calculated according to accounting methods that are standardized for all stock
and bond funds. Because yield accounting methods differ from the methods used
for other accounting purposes, the fund's yield may not equal the income paid on
shares or the income reported in the Fund's financial statements. The Fund may
also utilize tax equivalent yields of its Class A and Class B shares computed in
the same manner, with adjustment for assumed Federal income tax rates. For a
comparison of yields on municipal securities and taxable securities, see the
Taxable Equivalent Yield Table in Appendix A.
- -------------------------------------------------------------------------------
THE FUND MAY ADVERTISE ITS YIELD AND TOTAL
RETURN.
- -------------------------------------------------------------------------------
The Fund's total return shows the overall dollar or percentage change in value
of a hypothetical investment in the Fund, assuming the reinvestment of all
dividends. Cumulative total return shows the Fund's performance over a period of
time. Average annual total return shows the cumulative return divided over the
number of years included in the period. Because average annual total return
tends to smooth out variations in the Fund's performance, you should recognize
that it is not the same as actual year-to-year results.
Both total return and yield calculations for Class A shares generally include
the effect of paying the maximum sales charge (except as shown in "The Fund's
Financial Highlights"). Investments at a lower sales charge would result in
higher performance figures. Total return and yield for Class B shares reflects
the
11
<PAGE> 60
deduction of the applicable CDSC imposed on a redemption of shares held for the
applicable period. All calculations assume that all dividends are reinvested at
net asset value on the reinvestment dates during the periods. Total return and
yield of Class A and Class B shares will be calculated separately and, because
each class is subject to different expenses, the total return may differ with
respect to that class for the same period. The relative performance of the Class
A and Class B shares will be affected by a variety of factors, including the
higher operating expenses attributable to the Class B shares, whether the Fund's
investment performance is better in the earlier or later portions of the period
measured and the level of net assets of the Classes during the period. The Fund
will include the total return of Class A and Class B shares in any advertisement
or promotional materials including Fund performance data. The value of Fund
shares, when redeemed, may be more or less than their original cost. Both yield
and total return are historical calculations, and are not an indication of
future performance. See "Factors to Consider in Choosing an Alternative."
12
<PAGE> 61
HOW TO BUY SHARES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
The minimum initial investment in Class A and Class B shares is $1,000 ($250 for
group investments and retirement plans). Complete the Account Application attached
to this Prospectus. Indicate whether you are purchasing Class A or Class B shares.
If you do not specify which class of shares you are purchasing, Investor Services
will assume that you are investing in Class A shares.
</TABLE>
- -------------------------------------------------------------------------------
OPENING AN ACCOUNT
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------
BY CHECK 1. Make your check payable to John Hancock Investor Services
Corporation ("Investor Services"), P.O. Box 9115, Boston, MA
02205-9115.
2. Deliver the completed application and check to your registered
representative, a broker with an agreement with John Hancock
Funds ("Selling Broker") or mail it directly to Investor
Services.
- ---------------------------------------------------------------------------------
BY WIRE 1. Obtain an account number by contacting your registered
representative or Selling Broker, or by calling 1-800-225-5291.
2. Instruct your bank to wire funds to:
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock Tax-Free Bond Fund
Class A or Class B shares
Your Account Number
Name(s) under which account is registered
3. Deliver the completed application to your registered
representative, Selling Broker or mail it directly to Investor
Services.
- -------------------------------------------------------------------------------
BUYING ADDITIONAL CLASS A AND CLASS B
SHARES
- ---------------------------------------------------------------------------------
MONTHLY 1. Complete the "Automatic Investing" and "Bank Information"
AUTOMATIC sections on the Account Privileges Application designating a
ACCUMULATION bank account from which funds may be drawn.
PROGRAM
(MAAP)
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
2. The amount you elect to invest will be automatically withdrawn
from your bank or credit union account.
- ---------------------------------------------------------------------------------
BY TELEPHONE 1. Complete the "Invest-By-Phone" and "Bank Information" sections
on the Account Privileges Application designating a bank
account from which your funds may be drawn. Note that in order
to invest by phone, your account must be in a bank or credit
union that is a member of the Automated Clearing House system
(ACH).
2. After your authorization form has been processed, you may
purchase additional Class A or Class B shares by calling
Investor Services toll-free 1-800-225-5291.
3. Give the Investor Services representative the name(s) in which
your account is registered, the Fund name, the class of shares
you own, your account number, and the amount you wish to
invest.
4. Your investment normally will be credited to your account the
business day following your phone request.
- ---------------------------------------------------------------------------------
</TABLE>
13
<PAGE> 62
- -------------------------------------------------------------------------------
BUYING ADDITIONAL
CLASS A AND CLASS B
SHARES (CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
BY CHECK 1. Either complete the detachable stub included on your account
statement or include a note with your investment listing the
name of the Fund, the class of shares you own, your account
number and the name(s) in which the account is registered.
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
2. Make your check payable to John Hancock Investor Services
Corporation.
3. Mail the account information and check to:
John Hancock Investor Services Corporation
P.O. Box 9115
Boston, MA 02205-9115
or deliver it to your registered representative or Selling
Broker.
- ---------------------------------------------------------------------------------
BY WIRE Instruct your bank to wire funds to:
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock Tax Free-Bond Fund
Class A or Class B shares
Your Account Number
Name(s) under which account is registered
- ---------------------------------------------------------------------------------
Other Requirements: All purchases must be made in U.S. dollars. Checks written on
foreign banks will delay purchases until U.S. funds are received, and a collection
charge may be imposed. Shares of the Fund are priced at the offering price based
on the net asset value computed after Investor Services receives notification of
the dollar equivalent from the Fund's custodian bank. Wire purchases normally take
two or more hours to complete and, to be accepted the same day, must be received
by 4:00 P.M., New York time. Your bank may charge a fee to wire funds. Telephone
transactions are recorded to verify information. Certificates are not issued
unless a request is made in writing to Investor Services.
- ---------------------------------------------------------------------------------
</TABLE>
You will receive a statement of your account after any transaction that affects
your share balance or registration (statements related to reinvestment of
dividends and automatic investment/withdrawal plans will be sent to you
quarterly). A tax information statement will be mailed to you by January 31 of
each year.
- -------------------------------------------------------------------------------
YOU WILL RECEIVE ACCOUNT STATEMENTS THAT
YOU SHOULD KEEP TO HELP WITH YOUR PERSONAL
RECORDKEEPING.
- -------------------------------------------------------------------------------
SHARE PRICE
The net asset value per share ("NAV") is the value of one share. The NAV per
share is calculated by dividing the net assets of each class by the number of
outstanding shares of that class. The NAV of each class can differ in value.
Securities in the Fund's portfolio are valued on the basis of market quotations,
valuations provided by independent pricing services or, at fair value as
determined in good faith according to procedures approved by the Trustees.
Short-term debt investments maturing within 60 days are valued at amortized cost
which the Board has determined approximates market value. If quotations are not
readily available, assets are valued by a method that the Trustees believe
accurately reflects fair value.
- -------------------------------------------------------------------------------
THE OFFERING PRICE OF YOUR SHARES IS THEIR
NET ASSET VALUE PLUS A SALES CHARGE, IF
APPLICABLE, WHICH WILL VARY WITH THE
PURCHASE ALTERNATIVE YOU CHOOSE.
- -------------------------------------------------------------------------------
The NAV is calculated once daily as of the close of regular trading on the New
York Stock Exchange (the "Exchange") (generally at 4:00 P.M., New York time) on
each day that the Exchange is open.
Shares of the Fund are sold at the offering price based on the NAV computed
after your investment request is received in good order by John Hancock Funds.
If you
14
<PAGE> 63
buy shares of the Fund through a Selling Broker, the Selling Broker must receive
your investment before the close of regular trading on the Exchange and transmit
it to John Hancock Funds before its close of business to receive that day's
offering price.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES. The offering price you pay
for Class A shares of the Fund equals the NAV plus a sales charge as follows:
<TABLE>
<CAPTION>
COMBINED
SALES CHARGE AS REALLOWANCE REALLOWANCE TO
AMOUNT INVESTED SALES CHARGE AS A PERCENTAGE OF AND SERVICE FEE AS SELLING BROKERS AS
(INCLUDING SALES A PERCENTAGE OF THE AMOUNT A PERCENTAGE OF A PERCENTAGE OF
CHARGE) OFFERING PRICE INVESTED OFFERING PRICE(+) THE OFFERING PRICE(*)
- ------------------------------------- --------------- ------------------ ---------------------
<S> <C> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00% 3.76%
$100,000 to $249,999 3.75% 3.90% 3.25% 3.01%
$250,000 to $499,999 3.00% 3.09% 2.50% 2.26%
$500,000 to $999,999 2.00% 2.04% 1.75% 1.51%
$1,000,000 and over 0.00%(**) 0.00%(**) (***) 0.00%(***)
</TABLE>
(*) Upon notice to Selling Brokers with whom it has sales agreements, John
Hancock Funds may reallow an amount up to the full applicable sales
charge. In addition to the reallowance allowed to all selling Brokers,
John Hancock Funds will pay the following: round trip airfare to a resort
will be offered to each registered representative of a Selling Broker (if
the Selling Broker has agreed to participate) who sells certain amounts of
shares of John Hancock funds. John Hancock Funds will make these incentive
payments out of its own resources. A Selling Broker to whom substantially
the entire sales charge is reallowed or who receives these incentives may
be deemed to be an underwriter under the Securities Act of 1933. Other
than distribution and service fees, the Fund does not bear distribution
expenses.
(**) No sales charge is payable at the time of purchase in Class A shares of $1
million or more, but a CDSC may be imposed in the event of certain
redemption transactions within one year of purchase.
(***) John Hancock Funds may pay a commission and the first year's service fee
(as described in (+) below) to Selling Brokers who initiate and are
responsible for purchases of $1 million or more in aggregate as follows: 1
% on sales to $4,999,999, 0.50% on the next $5 million and 0.25% on
amounts over $10 million.
(+) At the time of sale, John Hancock Funds pays to Selling Brokers the first
year's service fee in advance in an amount equal to 0.25% of the net
assets invested in the Fund at the time of the sale, and thereafter, it
pays the service fee periodically in arrears in an amount up to 0.25% of
the Fund's average annual net assets. Selling Brokers receive the fee as
compensation for providing personal and account maintenance services to
shareholders.
Sales charges ARE NOT APPLIED to any dividends that are reinvested in additional
Class A shares of the Fund.
15
<PAGE> 64
In addition, John Hancock Funds will pay certain affiliated Selling Brokers at
an annual rate of up to 0.05% of the daily net assets of accounts attributable
to these brokers.
Under certain circumstances described below, investors in Class A shares may be
entitled to pay reduced sales charges. See "Qualifying for a Reduced Sales
Charge."
CONTINGENT DEFERRED SALES CHARGE -- INVESTMENTS OF $1 MILLION OR MORE IN CLASS A
SHARES. Purchases of $1 million or more of Class A shares will be made at net
asset value with no initial sales charge, but if the shares are redeemed within
12 months after the end of the calendar month in which the purchase was made
(the CDSC period), a CDSC will be imposed. The rate of the CDSC will depend on
the amount invested as follows:
<TABLE>
<CAPTION>
AMOUNT INVESTED CDSC RATE
- ---------------------------------------------------------------------------------
<S> <C>
$1 million to $4,999,999................................................ 1.00%
Next $5 million to $9,999,999........................................... 0.50%
Amounts of $10 million and over......................................... 0.25%
</TABLE>
Existing full service clients of the Life Company who were group annuity
contract holders as of September 1, 1994 and participant directed defined
contribution plans with at least 100 eligible employees at the inception of the
Fund Account may purchase Class A shares with no initial sales charge. However,
if the shares are redeemed within 12 months after the end of the calendar year
in which the purchase was made, a CDSC will be imposed at the above rate.
The CDSC will be assessed on an amount equal to the lesser of the current market
value or the original purchase cost of the Class A shares that have been
redeemed. Accordingly, no CDSC will be imposed on increases in account value
above the initial purchase price, including any distributions which have been
reinvested in additional Class A shares.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
Therefore, it will be assumed that the redemption is first made from any shares
in your account that are not subject to the CDSC. The CDSC is waived on
redemptions in certain circumstances. See "Waiver of Contingent Deferred Sales
Charge" below.
- -------------------------------------------------------------------------------
YOU MAY QUALIFY FOR A
REDUCED SALES CHARGE ON
YOUR INVESTMENT IN
CLASS A SHARES.
- -------------------------------------------------------------------------------
QUALIFYING FOR A REDUCED SALES CHARGE. If you invest more than $100,000 in
Class A shares of the Fund or a combination of funds within the John Hancock
family of funds (except money market funds), you may qualify for a reduced sales
charge on your investments in Class A shares through a LETTER OF INTENTION. You
may also be able to use the ACCUMULATION PRIVILEGE and the COMBINATION PRIVILEGE
to take advantage of the value of your previous investments in Class A shares of
the John Hancock funds in meeting the breakpoints for a reduced sales charge.
For the ACCUMULATION PRIVILEGE and COMBINATION PRIVILEGE, the applicable sales
charge will be based on the total of:
1. Your current purchase of Class A shares of the Fund.
16
<PAGE> 65
2. The net asset value (at the close of business on the previous day) of (a)
all Class A shares of the Fund you hold, and (b) all Class A shares of any
other John Hancock funds you hold; and
3. The net asset value of all shares held by another shareholder eligible to
combine his or her holdings with you into a single "purchase."
EXAMPLE:
If you hold Class A shares of a John Hancock fund with a net asset value of
$80,000 and, subsequently, invest $20,000 in Class A shares of the Fund, the
sales charge on this subsequent investment would be 3.75% and not 4.50%. This
rate is the rate that would otherwise be applicable to investments of less than
$100,000. See "Initial Sales Charge alternative -- Class A Shares."
If you are in one of the following categories, you may purchase Class A shares
of the Fund without paying a sales charge:
- - A Trustee or officer of the Fund; a Director or officer of the Adviser and its
affiliates or Selling Brokers; employees or sales representatives of any of
the foregoing; retired officers, employees or Directors of any of the
foregoing; a member of the immediate family of any of the foregoing; or any
Fund, pension, profit sharing or other benefit plan for the individuals
described above.
- -------------------------------------------------------------------------------
CLASS A SHARES MAY BE AVAILABLE WITHOUT A
SALES CHARGE TO CERTAIN INDIVIDUALS AND
ORGANIZATIONS.
- -------------------------------------------------------------------------------
- - Any state, county, city or any instrumentality, department, authority, or
agency of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any registered
investment management company.*
- - A bank, trust company, credit union, savings institution or other types of
depository institution, its trust departments or common trust funds if it is
purchasing $1 million or more for non-discretionary customers or accounts.*
- - A broker, dealer or registered investment adviser that has entered into an
agreement with John Hancock Funds providing specifically for the use of Fund
shares in fee-based investment products made available to their clients.
- - A former participant in an employee benefit plan with John Hancock funds, when
he/she withdraws from his/her plan and transfers any or all of his/her plan
distributions directly to the Fund.
- ------------------
*For investments made under these provisions, John Hancock Funds may make a
payment out of its own resources to the Selling Broker in an amount not to
exceed 0.25% of the amount invested.
Class A shares of the Fund may be purchased without an initial sales charge in
connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE -- CLASS B SHARES. Class B shares
are offered at net asset value per share without a sales charge so that your
entire initial investment will go to work at the time of purchase. However,
Class B shares redeemed within six years of purchase will be subject to a CDSC
at the
17
<PAGE> 66
rates set forth below. This charge will be assessed on an amount equal to the
lesser of the current market value or the original purchase cost of the shares
being redeemed. Accordingly, you will not be assessed a CDSC on increases in
account value above the initial purchase price, including shares derived from
dividend reinvestment.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period or those you acquired through
reinvestment of dividends and next from the shares you have held the longest
during the six-year period. The CDSC is waived on redemptions in certain
circumstances. See the discussion "Waiver of Contingent Deferred Sales Charges"
below.
EXAMPLE:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time, your CDSC will be calculated as follows:
<TABLE>
<S> <C>
- - Proceeds of 50 shares redeemed at $12 per share $ 600
- - Minus proceeds of 10 shares not subject to CDSC because they were
acquired through dividend reinvestment (10 X $12) -120
- - Minus appreciation on remaining shares, also not subject to CDSC (40 X
$2) - 80
------
- - Amount subject to CDSC $ 400
</TABLE>
Proceeds from the CDSC are paid to John Hancock Funds. John Hancock Funds uses
part of them to defray its expenses related to providing the Fund with
distribution services connected to the sale of Class B shares, such as
compensating Selling Brokers for selling these shares. The combination of the
CDSC and the distribution and service fees makes it possible for the Fund to
sell Class B shares without deducting a sales charge at the time of the
purchase.
The amount of the CDSC, if any, will vary depending on the number of years from
the time you purchase your Class B shares until the time you redeem them. Solely
for the purposes of determining the holding period, any payments you make during
the month will be aggregated and deemed to have been made on the last day of the
month.
<TABLE>
<CAPTION>
YEAR IN WHICH
CLASS B SHARES CONTINGENT DEFERRED SALES
REDEEMED FOLLOWING CHARGE AS A PERCENTAGE OF
PURCHASE DOLLAR AMOUNT SUBJECT TO CDSC
- ------------------------------------------------------------------------------------
<S> <C>
First 5.0%
Second 4.0%
Third 3.0%
Fourth 3.0%
Fifth 2.0%
Sixth 1.0%
Seventh and thereafter None
</TABLE>
18
<PAGE> 67
A commission equal to 3.75% of the amount invested and a first year's service
fee equal to 0.25% of the amount invested are paid to Selling Brokers. The
initial service fee is paid in advance at the time of sale for the provision of
personal and account maintenance services to shareholders during the twelve
months following the sale, and thereafter the service fee is paid in arrears.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to a CDSC,
unless indicated otherwise, in these circumstances:
- - Redemptions of Class B shares made under Systematic Withdrawal Plan (see "How
to Redeem Shares"), as long as your annual redemptions do not exceed 10% of
your account value at the time you establish your Systematic Withdrawal Plan
and 10% of the value of your subsequent investments (less redemptions) in that
account at the time you notify Investor Services. This waiver does not apply
to Systematic Withdrawal Plan redemptions of Class A shares that are subject
to a CDSC.
- -------------------------------------------------------------------------------
UNDER CERTAIN CIRCUMSTANCES, THE CDSC
ON CLASS B AND CERTAIN
CLASS A SHARE REDEMPTIONS WILL BE WAIVED.
- -------------------------------------------------------------------------------
- - Redemptions made to effect distributions from an Individual Retirement Account
either before or after age 59 1/2, as long as the distributions are based on
the life expectancy of the joint-and-last survivor life expectancy of you and
your beneficiary. These distributions must be free from penalty under the
Code.
- - Redemptions made to effect mandatory distributions under the Code after age
70 1/2 from a tax-deferred retirement plan.
- - Redemptions made to effect distributions to participants or beneficiaries from
certain employer-sponsored retirement plans including those qualified under
Section 401(a) of the Code, custodial accounts under Section 403(b)(7) of the
Code and deferred compensation plans under Section 457 of the Code. The waiver
also applies to certain returns of excess contributions made to these plans.
In all cases, the distributions must be free from penalty under the Code.
- - Redemptions due to death or disability.
- - Redemptions made under the Reinvestment Privilege, as described in "Additional
Services and Programs" of this Prospectus.
- - Redemptions made pursuant to the Fund's right to liquidate your account if you
have less than $100 invested in the Fund.
- -Redemptions made in connection with certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
- -Redemptions from certain IRA and retirement plans that purchased shares prior
to October 1, 1992.
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services either directly or through your Selling Broker at the time you
make your redemption. The waiver will be granted once Investor Services has
confirmed that you are entitled to the waiver.
19
<PAGE> 68
CONVERSION OF CLASS B SHARES. Your Class B shares and an appropriate portion of
reinvested dividends on those shares will be converted into Class A shares
automatically. This will occur no later than the month following eight years
after the shares were purchased, and will result in lower annual distribution
fees. If you exchanged Class B shares into the Fund from another John Hancock
fund, the calculation will be based on the time you purchased the shares in the
original fund. The Fund has been advised that the conversion of Class B shares
to Class A shares should not be taxable for Federal income tax purposes and
should not change a shareholder's tax basis or tax holding period for the
converted shares.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any business day. Your shares
will be redeemed at the next NAV calculated after your redemption request is
received in good order by Investor Services, less any applicable CDSC. The Fund
may hold payment until it is reasonably satisfied that investments recently made
by check or Invest-by-Phone have been collected (which may take up to 10
calendar days).
- -------------------------------------------------------------------------------
TO ASSURE ACCEPTANCE OF YOUR REDEMPTION
REQUEST, PLEASE FOLLOW THESE PROCEDURES.
- -------------------------------------------------------------------------------
Once your shares are redeemed, the Fund generally sends you payment on the next
business day. When you redeem your shares, you may realize a taxable gain or
loss depending usually on the difference between what you paid for them and what
you receive for them, subject to certain tax rules. Under unusual circumstances,
the Fund may suspend redemptions or postpone payment for up to seven days or
longer, as permitted by Federal securities laws.
20
<PAGE> 69
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
BY TELEPHONE All Fund shareholders are automatically eligible for the
telephone redemption privilege. Call 1-800-225-5291, from
8:00 A.M. to 4:00 P.M. (New York time), Monday through
Friday, excluding days on which the Exchange is closed.
Investor Services employs the following procedures to
confirm that instructions received by telephone are
genuine. Your name, the account number, taxpayer
identification number applicable to the account and other
relevant information may be requested. In addition,
telephone instructions are recorded.
You may redeem up to $100,000 by telephone, but the address
on the account must not have changed for the last thirty
days. A check will be mailed to the exact name(s) and
address shown on the account.
If reasonable procedures, such as those described above,
are not followed, the Fund may be liable for any loss due
to unauthorized or fraudulent telephone instructions. In
all other cases, neither the Fund nor Investor Services
will be liable for any loss or expense for acting upon
telephone instructions made in accordance with the
telephone transaction procedures mentioned above.
Telephone redemption is not available for IRAs or other
tax-qualified retirement plans or shares of the Fund that
are in certificated form.
During periods of extreme economic conditions or market
changes, telephone requests may be difficult to implement
due to a large volume of calls. During these times, you
should consider placing redemption requests in writing or
use EASI-Line. EASI-Line's telephone number is
1-800-338-8080.
- ---------------------------------------------------------------------------------
BY WIRE If you have a telephone redemption form on file with the
Fund, redemption proceeds of $1,000 or more can be wired on
the next business day to your designated bank account, and
a fee (currently $4.00) will be deducted. You may also use
electronic funds transfer to your assigned bank account,
and the funds are usually collectible after two business
days. Your bank may or may not charge a fee for this
service. Redemptions of less than $1,000 will be sent by
check or electronic funds transfer.
This feature may be elected by completing the "Telephone
Redemption" section on the Account Privileges Application
included with this Prospectus.
- ---------------------------------------------------------------------------------
IN WRITING Send a stock power or "letter of instruction" specifying
the name of the Fund, the dollar amount or the number of
shares to be redeemed, your name, class of shares, your
account number and the additional requirements listed below
that apply to your particular account.
- ---------------------------------------------------------------------------------
</TABLE>
21
<PAGE> 70
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TYPE OF REGISTRATION REQUIREMENTS
--------------------------------- --------------------------------------------
<S> <C> <C>
Individual, Joint Tenants, Sole A letter of instruction signed (with titles
Proprietorship, Custodial where applicable) by all persons authorized
(Uniform Gifts or Transfer to to sign for the account, exactly as it is
Minors Act), General Partners registered with the signature(s) guaran-
teed.
Corporation, Association A letter of instruction and a corporate
resolution, signed by person(s) authorized
to act on the account with the signature(s)
guaranteed.
Trusts A letter of instruction signed by the
trustee(s) with the signature(s) guaranteed.
(If the Trustee's name is not registered on
your account, also provide a copy of the
trust document, certified within the last 60
days.
If you do not fall into any of these registration categories, please call
1-800-225-5291 for further instructions.
- ---------------------------------------------------------------------------------
WHO MAY GUARANTEE YOUR SIGNATURE.
- -------------------------------------------------------------------------------
A signature guarantee is a widely accepted way to protect you and the Fund by
verifying the signature on your request. It may not be provided by a notary
public. If the net asset value of the shares redeemed is $100,000 or less, John
Hancock Funds may guarantee the signature. The following institutions may
provide you with a signature guarantee, provided that the institution meets
credit standards established by Investor Services: (i) a bank; (ii) a securities
broker or dealer, including a government or municipal securities broker or
dealer, that is a member of a clearing corporation or meets certain net capital
requirements; (iii) a credit union having authority to issue signature
guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, a federal savings bank or association; or (v) a
national securities exchange, a registered securities exchange or a clearing
agency.
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT REDEMPTIONS.
- -------------------------------------------------------------------------------
THROUGH YOUR BROKER. Your broker may be able to initiate the redemption.
Contact your broker for instructions.
</TABLE>
- -------------------------------------------------------------------------------
<TABLE>
<S> <C> <C>
- ---------------------------------------------------------------------------------
If you have certificates for your shares, you must submit them with your stock
power or a letter of instructions. Unless you specify to the contrary, any
outstanding Class A shares will be redeemed before Class B shares. You may not
redeem certificated shares by telephone.
Due to the proportionately high cost of maintaining small accounts, the Fund
reserves the right to redeem at net asset value all shares in an account which
holds less than $100 (except accounts under retirement plans) and to mail the
proceeds to the shareholder, or the transfer agent may impose an annual fee of
$10.00. No account will be involuntarily redeemed or additional fee imposed, if
the value of the account is in excess of the Fund's minimum initial investment
or if the value of the account falls below the required minimum as a result of
market action. No CDSC will be imposed on involuntary redemptions of shares.
Shareholders will be notified before these redemptions are to be made or this
fee is imposed, and will have 30 days to purchase additional shares to bring
their account balance up to the required minimum. Unless the number of shares
acquired by further purchases and dividend reinvestments, if any, exceeds the
number of shares redeemed, repeated redemptions from a smaller account may
eventually trigger this policy.
- ---------------------------------------------------------------------------------
</TABLE>
22
<PAGE> 71
ADDITIONAL SERVICES AND PROGRAMS
EXCHANGE PRIVILEGE
If your investment objective changes, or if you wish to achieve further
diversification, John Hancock offers other funds with a wide range of investment
goals. Contact your registered representative or Selling Broker and request a
prospectus for the John Hancock funds that interest you. Read the prospectus
carefully before exchanging your shares. You can exchange shares of each class
of the Fund only for shares of the same class of another John Hancock fund. For
this purpose, John Hancock funds with only one class of shares will be treated
as Class A, whether or not they have been so designated.
- -------------------------------------------------------------------------------
YOU MAY EXCHANGE SHARES OF THE FUND ONLY
FOR SHARES OF THE SAME CLASS OF ANOTHER
JOHN HANCOCK FUND.
- -------------------------------------------------------------------------------
Exchanges between funds with shares that are not subject to a CDSC are based on
their respective net asset values. No sales charge or transaction charge is
imposed. Class B shares of the Fund that are subject to a CDSC may be exchanged
into Class B shares of another John Hancock fund without incurring the CDSC;
however, these shares will be subject to the CDSC schedule of the shares
acquired (except that exchanges into John Hancock Short-Term Strategic Income
Fund, John Hancock Limited-Term Government Fund and John Hancock Adjustable U.S.
Government Trust will be subject to the initial fund's CDSC). For purposes of
computing the CDSC payable upon redemption of shares acquired in an exchange,
the holding period of the original shares is added to the holding period of the
shares acquired in an exchange. However, if you exchange Class B shares
purchased prior to January 1, 1994 for Class B shares of any other John Hancock
Fund, you will be subject to the CDSC schedule in effect on your initial
purchase date.
You may exchange Class B shares of the Fund into shares of a John Hancock money
market fund at net asset value; however, you will continue to be subject to the
same CDSC upon redemption.
The Fund reserves the right to require you to keep previously exchanged shares
(and reinvested dividends) in the Fund for 90 days before you are permitted to
execute a new exchange. The Fund may also terminate or alter the terms of the
exchange privilege, upon 60 days' notice to shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares in another for Federal income tax purposes. An exchange may
result in a taxable gain or loss.
When you make an exchange, your account registration in both the existing and
new account must be identical. The exchange privilege is available only in
states where the exchange can be made legally.
Under exchange agreements with John Hancock Funds, certain dealers, brokers and
investment advisers may exchange their clients' Fund shares, subject to the
terms of those agreements and John Hancock Funds' right to reject or suspend
those exchanges at any time. Because of the restrictions and procedures under
those agreements, the exchanges may be subject to timing limitations and other
23
<PAGE> 72
restrictions that do not apply to exchanges requested by shareholders directly,
as described above.
Because Fund performance and shareholders can be hurt by excessive trading, the
Fund reserves the right to terminate the exchange privilege for any person or
group that, in John Hancock Funds' judgment, is involved in a pattern of
exchanges that coincide with a "market timing" strategy that may disrupt the
Fund's ability to invest effectively according to its investment objective and
policies, or might otherwise affect the Fund and its shareholders adversely. The
Fund may also temporarily or permanently terminate the exchange privilege for
any person who makes seven or more exchanges out of the Fund per calendar year.
Accounts under common control or ownership will be aggregated for this purpose.
Although the Fund will attempt to give you prior notice whenever it is
reasonably able to do so, it may impose these restrictions at any time.
BY TELEPHONE
1. When you complete the application for your initial purchase of Fund shares,
you automatically authorize exchanges by telephone unless you check the box
indicating that you do not wish to authorize telephone exchanges.
2. Call 1-800-225-5291. Have the account number of your current fund and the
exact name in which it is registered available to give to the telephone
representative.
3. Investor Services employs the following procedures to confirm that
instructions received by telephone are genuine. Your name, the account
number, taxpayer identification number applicable to the account and other
relevant information may be requested. In addition, telephone instructions
are recorded.
IN WRITING
1. In a letter, request an exchange and list the following:
-- the name and class of the Fund whose shares you currently own
-- your account number
-- the name(s) in which the account is registered
-- the name of the fund in which you wish your exchange to be invested
-- the number of shares, all shares or dollar amount you wish to exchange
Sign your request exactly as the account is registered.
2. Mail the request and information to:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
24
<PAGE> 73
REINVESTMENT PRIVILEGE
1. You will not be subject to a sales charge on Class A shares reinvested in
shares of any John Hancock fund that is otherwise subject to a sales charge
as long as you reinvest within 120 days from the redemption date. If you paid
a CDSC upon a redemption, you may reinvest at net asset value in the same
class of shares from which you redeemed within 120 days. Your account will be
credited with the amount of the CDSC previously charged, and the reinvested
shares will continue to be subject to a CDSC. For purposes of computing the
CDSC payable upon a subsequent redemption, the holding period of the shares
acquired through reinvestment will include the holding period of the redeemed
shares.
- -------------------------------------------------------------------------------
IF YOU REDEEM SHARES OF THE FUND, YOU MAY
BE ABLE TO REINVEST ALL OR PART OF THE
PROCEEDS IN SHARES OF THIS FUND OR ANOTHER
JOHN HANCOCK FUND WITHOUT PAYING AN
ADDITIONAL SALES CHARGE.
- -------------------------------------------------------------------------------
2. Any portion of your redemption may be reinvested in Fund shares or in shares
of any of the other John Hancock funds, subject to the minimum investment
limit of that fund.
3. To reinvest, you must notify Investor Services in writing. Include the Fund's
name, the account number and class from which your shares were originally
redeemed.
SYSTEMATIC WITHDRAWAL PLAN
1. You can elect the Systematic Withdrawal Plan at any time by completing the
Account Privileges Application which is attached to this Prospectus. You can
also obtain this application by calling your registered representative or by
calling 1-800-225-5291.
2. To be eligible, you must have at least $5,000 in your account.
- -------------------------------------------------------------------------------
YOU CAN PAY ROUTINE BILLS FROM YOUR
ACCOUNT, OR MAKE PERIODIC DISBURSEMENTS OF
FUNDS FROM YOUR RETIREMENT ACCOUNT TO
COMPLY WITH IRS REGULATIONS.
- -------------------------------------------------------------------------------
3. Payments from your account can be made monthly, quarterly, semi-annually or
annually or on a selected monthly basis to yourself or any other designated
payee.
4. There is no limit on the number of payees you may authorize, but all payments
must be made at the same time or intervals.
5. It is not advantageous to maintain a Systematic Withdrawal Plan concurrently
with purchases of additional Class A or Class B shares, because you may be
subject to initial sales charges on your purchases of Class A shares or to a
CDSC on your redemptions of Class B shares. In addition, your redemptions are
taxable events.
6. Redemptions will be discontinued if the U.S. Postal Service cannot deliver
your checks or if deposits to a bank account are returned for any reason.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM (MAAP)
1. You can authorize an investment to be automatically withdrawn each month from
your bank, for investment in Fund shares under the "Automatic Investing" and
"Bank Information" sections of the Account Privileges Application.
- -------------------------------------------------------------------------------
YOU CAN MAKE AUTOMATIC INVESTMENTS AND
SIMPLIFY YOUR INVESTING.
- -------------------------------------------------------------------------------
25
<PAGE> 74
2. You can also authorize automatic investment through payroll deduction by
completing the "Direct Deposit Investing" section of the Account Privileges
Application.
3. You can terminate your Monthly Automatic Accumulation Program plan at any
time.
4. There is no charge to you for this program, and there is no cost to the Fund.
5. If you have payments being withdrawn from a bank account and we are notified
that the account has been closed, your withdrawals will be discontinued.
GROUP INVESTMENT PROGRAM
1. An individual account will be established for each participant, but the
initial sales charge for Class A shares will be based on the aggregate dollar
amount of all participants' investments. To determine how to qualify for this
program, contact your registered representative or call 1-800-225-5291.
- -------------------------------------------------------------------------------
ORGANIZED GROUPS OF AT LEAST FOUR PERSONS
MAY ESTABLISH ACCOUNTS.
- -------------------------------------------------------------------------------
2. The initial aggregate investment of all participants in the group must be at
least $250.
3. There is no additional charge for this program. There is no obligation to
make investments beyond the minimum, and you may terminate the program at any
time.
INVESTMENTS, TECHNIQUES AND RISK FACTORS
RESTRICTED AND ILLIQUID SECURITIES. The Fund may invest up to 10% of its net
assets in illiquid investments, which include repurchase agreements maturing in
more than seven days, restricted securities and securities not readily
marketable. The Fund may also invest up to 10% of its assets in restricted
securities eligible for resale to certain institutional investors pursuant to
Rule 144A under the Securities Act of 1933. To the extent that the Fund's
holdings of participation interests, COPs and inverse floaters are determined to
be illiquid, such holdings will be subject to the 10% restriction on illiquid
investments.
LENDING OF SECURITIES AND REPURCHASE AGREEMENTS. For the purpose of realizing
additional (taxable) income, the Fund may lend to broker-dealers portfolio
securities amounting to not more than 33% of its total assets taken at current
value or may enter into repurchase agreements. In a repurchase agreement, the
Fund buys a security subject to the right and obligation to sell it back to the
issuer at the same price plus accrued interest. These transactions must be fully
collateralized at all times. The Fund may reinvest any cash collateral in
short-term highly liquid debt securities. However, they may involve some credit
risk to the Fund if the other party should default on its obligation and the
Fund is delayed in or prevented from recovering the collateral. Securities
loaned by the Fund will remain subject to fluctuations of market value.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Fund may purchase securities
on a forward or "when-issued" basis and may purchase or sell securities
26
<PAGE> 75
on a forward commitment basis to hedge against anticipated changes in interest
rates and prices. When the Fund engages in such transactions, it relies on the
seller or the buyer, as the case may be, to consummate the transaction. Failure
to consummate the transaction may result in the Fund's losing the opportunity to
obtain an advantageous price and yield. If the Fund chooses to dispose of the
right to acquire a when-issued security prior to its acquisition or dispose of
its right to deliver or receive against a forward commitment, it can incur a
taxable gain or a loss.
SHORT TERM TRADING AND PORTFOLIO TURNOVER. Short-term trading means the
purchase and subsequent sale of a security after it has been held for a
relatively brief period of time. Short term trading may have the effect of
increasing portfolio turnover and may increase net short-term capital gains,
distributions from which would be taxable to shareholders as ordinary income.
The Fund does not intend to invest for the purpose of seeking short-term
profits. The Fund's portfolio securities may be changed, however, without regard
to the holding period of these securities (subject to certain tax restrictions),
when the Adviser deems that this action will help achieve the Fund's objective
given a change in an issuer's operations or changes in general market
conditions. The Fund's portfolio turnover rate is set forth in the table under
the caption "Financial Highlights."
OPTIONS AND FUTURES TRANSACTIONS. The Fund may buy and sell options contracts
on securities and debt security indices, interest rate and municipal bond index
futures contracts and options on such futures contracts. Options and futures
contracts are bought and sold to manage the Fund's exposure to changing interest
rates and security prices. Some options and futures strategies, including
selling futures, buying puts and writing calls, tend to hedge a Fund's
investment against price fluctuations. Other strategies, including buying
futures, writing puts, and buying calls, tend to increase market exposure.
Options and futures may be combined with each other or with forward contracts in
order to adjust the risk and return characteristics of the overall strategy. The
Fund may invest in options and futures based on debt securities and municipal
bond indices (securities indices).
Options and futures can be volatile investments and involve certain risks. If
the Adviser applies a hedge at an inappropriate time or judges market conditions
incorrectly, options and futures strategies may lower the Fund's return. The
Fund could also experience losses if the prices of its options and futures
positions were poorly correlated with its other investments, or if it could not
close out its positions because of an illiquid secondary market. Options and
futures do not pay interest, but may produce taxable capital gains or losses.
The Fund will not engage in a transaction in futures or options on futures if,
immediately thereafter, the sum of initial margin deposits and premiums required
to establish positions in futures contracts and options on futures would exceed
5% of the Fund's net assets. The loss incurred by the Fund investing in futures
contracts and in writing options on futures is potentially unlimited and may
exceed the amount of any premium received. The Fund's transactions in options
and futures contracts may be limited by the requirements of the Code for
qualification as a regulated investment company. See the Statement of Additional
Information
27
<PAGE> 76
for further discussion of options and futures transactions, including tax
effects and investment risks.
MUNICIPAL LEASE OBLIGATIONS. The Fund may purchase participation interests
which give the Fund an undivided pro rata interest in the tax exempt security.
For certain participation interests, the Fund will have the right to demand
payment, on a specified number of days' notice for all or any part of the Fund's
participation interest in the tax exempt security plus accrued interest.
Participation interests, which are determined to be not readily marketable, will
be considered illiquid for purposes of the Fund's 10% restriction on investment
in securities.
The Fund may also invest in Certificates of Participation ("COP's") which
provide participation interests in lease revenues. Each COP represents a
proportionate interest in or right to the lease-purchase payment made under
municipal lease obligations or installment sales contracts. Municipal lease
obligations are issued by a state or municipal financing authority to provide
funds for the construction of facilities (e.g., schools, dormitories, office
buildings or prisons) or the acquisition of equipment. Certain municipal lease
obligations may trade infrequently. Accordingly, COPs will be purchased and
monitored pursuant to analysis by the Adviser and reviewed according to
procedures by the Board of Trustees which consider various factors in
determining the liquidity risk. COPs will not be considered illiquid for
purposes of the Fund's 10% limitation on illiquid securities provided the
Adviser determines that there is a readily available market for such securities.
An investment in COPs is subject to the risk that a municipality may not
appropriate sufficient funds to meet payments on the underlying lease
obligation. See the Statement of Additional Information for additional
discussion of participation interests and municipal lease obligations.
DERIVATIVE INSTRUMENTS. The Fund may purchase or enter into derivative
instruments to enhance return, to hedge against fluctuations in interest rates
or securities prices, to change the duration of the Fund's fixed income
portfolio or as a substitute for the purchase or sale of securities. The Fund's
investments in derivative securities may include certain floating rate and
indexed securities. The Fund's transactions in derivative contracts may include
the purchase or sale of futures contracts on securities or indices; options on
futures contracts; and options on securities or indices. All of the Funds'
transactions in derivative instruments involve a risk of loss or depreciation
due to unanticipated adverse changes in interest rates or securities prices. The
loss on derivative contracts may exceed the Fund's initial investment in these
contracts. In addition, the Fund may lose the entire premium paid for purchased
options that expire before they can be profitably exercised by the Fund. The
Fund may realize taxable income or gain from its transactions in derivative
contracts, distributions of which will be taxable to shareholders.
INDEXED SECURITIES. The Fund may invest in indexed securities, including
floating rate securities that are subject to a maximum interest rate ("capped
floaters") and leveraged inverse floating rate securities ("inverse floaters")
(up to 10% of the Fund's total assets). The interest rate or, in some cases, the
principal payable at the maturity of an indexed security may change positively
or inversely in relation to
28
<PAGE> 77
one or more interest rates, financial indices or other financial indicators
("reference prices"). An indexed security may be leveraged to the extent that
the magnitude of any change in the interest rate or principal payable on an
indexed security is a multiple of the change in the reference price. Thus,
indexed securities may decline in value due to adverse market changes in
interest rates or other reference prices.
RISKS ASSOCIATED WITH DERIVATIVE SECURITIES AND CONTRACTS. The risks associated
with the Fund's transactions in derivative securities and contracts may include
some or all of the following:
Market Risk. Investments in floating rate and indexed securities are subject to
the interest rate and other market risks described above. Entering into a
derivative contract involves a risk that the applicable market will move against
the Fund's position and that the Fund will incur a loss. For derivative
contracts other than purchased options, this loss may exceed the amount of the
initial investment made or the premium received by the Fund.
Leverage and Volatility Risk. Derivative instruments may sometimes increase or
leverage the Fund's exposure to a particular market risk. Leverage enhances the
price volatility of derivative instruments held by the Fund. The Fund may
partially offset the leverage inherent in derivative contracts by maintaining a
segregated account consisting of cash and liquid, high grade debt securities, by
holding offsetting portfolio securities or contracts or by covering written
options.
Correlation Risk. A Fund's success in using derivative instruments to hedge
portfolio assets depends on the degree of price correlation between the
derivative instrument and the hedged asset. Imperfect correlation may be caused
by several factors, including temporary price disparities among the trading
markets for the derivative instrument, the assets underlying the derivative
instrument and the Fund's portfolio assets.
Credit Risk. Derivative securities and over-the-counter derivative contracts
involve a risk that the issuer or counterparty will fail to perform its
contractual obligations.
Liquidity and Valuation Risk. Some derivative securities are not readily
marketable or may become illiquid under adverse market conditions. In addition,
during periods of extreme market volatility, a commodity or exchange may suspend
or limit trading in an exchange-traded derivative contract, which may make the
contract temporarily illiquid and difficult to price. The staff of the SEC takes
the position that certain over-the-counter options are subject to the Fund's 10%
limit on illiquid investments. The Fund's ability to terminate over-the-counter
derivative contracts may depend on the cooperation of the counterparties to such
contracts. For thinly traded derivative securities and contracts, the only
source of price quotations may be the selling dealer or counterparty.
29
<PAGE> 78
APPENDIX A
TAXABLE EQUIVALENT YIELD TABLE
(UNDER FEDERAL INCOME TAX LAW AND RATES FOR 1995)
The table below shows the approximate taxable bond yields which are equivalent
to tax-exempt bond yields from 4% to 10% under Federal income tax laws that
apply to 1995. Separate calculations, showing the applicable taxable income
brackets, are provided for investors who file joint returns and for those
investors who file single returns.
EQUIVALENT YIELD TABLE
<TABLE>
<CAPTION>
(TAXABLE INCOME)* INCOME TAX-EXEMPT YIELD
- ------------------------------------
TAX ----------------------------------------------------------
SINGLE RETURN JOINT RETURN BRACKET 4% 5% 6% 7% 8% 9% 10%
- --------------------------------------------- ------- ------ ------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$ 0-23,350 $ 0-39,000 15.0% 4.71% 5.88% 7.06% 8.24% 9.41% 10.59% 11.76%
$ 23,351-56,550 $ 39,001-94,250 28.0% 5.56% 6.94% 8.33% 9.72% 11.11% 12.50% 13.89%
$ 56,551-117,950 $ 94,251-143,600 31.0% 5.80% 7.25% 8.70% 10.14% 11.59% 13.04% 14.49%
$ 117,951-256,500 $ 143,601-256,500 36.0% 6.25% 7.81% 9.38% 10.94% 12.50% 14.06% 15.63%
Over $256,500 Over $256,500 39.6% 6.62% 8.28% 9.93% 11.59% 13.25% 14.90% 16.56%
</TABLE>
* Net amount subject to Federal income tax after deductions and exemptions. It
is assumed that an investor filing a single return is not a "head of
household," a "married individual filing a separate return," or a "surviving
spouse." The table does not take into account the effects of reductions in the
deductibility of itemized deductions or the phaseout of personal exemptions
for taxpayers with adjusted gross incomes in excess of specified amounts.
Further, the table does not attempt to show any alternative minimum tax
consequences, which will depend on each shareholder's particular tax situation
and may vary according to what portion, if any, of the Fund's exempt-interest
dividends is attributable to interest on certain private activity bonds for
any particular taxable year. No assurance can be given that the Fund will
achieve any specific tax-exempt yield or that all of its income distributions
will be tax-exempt. Distributions attributable to any taxable income or
capital gains realized by the Fund will not be tax-exempt.
The information set forth above is as of the date of this Prospectus. Subsequent
tax law changes could result in prospective or retroactive changes in the tax
brackets, tax rates, and tax-equivalent yields set forth above.
30
<PAGE> 79
JOHN HANCOCK
JOHN HANCOCK
TAX-FREE BOND FUND
TAX-FREE BOND
FUND
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
CLASS A AND CLASS B SHARES
PRINCIPAL DISTRIBUTOR
PROSPECTUS
John Hancock Funds, Inc.
MAY 1, 1995
101 Huntington Avenue
Boston, Massachusetts 02199-7603
A MUTUAL FUND SEEKING TO
OBTAIN AS
HIGH LEVEL OF INTEREST
INCOME
CUSTODIAN
EXEMPT FROM FEDERAL INCOME
TAXES AS
Investors Bank
IN CONSISTENT WITH
PRESERVATION OF
& Trust Company
CAPITAL.
24 Federal Street
Boston, Massachusetts 02110
TRANSFER AGENT
John Hancock Investor Services
Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
HOW TO OBTAIN INFORMATION
ABOUT THE FUND
For Service Information
For Telephone Exchange call
1-800-225-5291
For Investment-by-Phone
For Telephone Redemption
For TDD call 1-800-554-6713
101 HUNTINGTON AVENUE
T240P 5/95
BOSTON, MASSACHUSETTS 02199-7603
TELEPHONE 1-800-225-5291
(LOGO) Printed on Recycled Paper
<PAGE> 80
EXHIBIT B
AGREEMENT AND PLAN OF REORGANIZATION
THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made this
18th day of March, 1996, by and between John Hancock Tax-Free Bond Fund (the
"Acquiring Fund"), a Massachusetts business trust, and John Hancock Tax-Exempt
Income Fund (the "Acquired Fund"), a Massachusetts business trust, each with
their principal place of business at 101 Huntington Avenue, Boston,
Massachusetts 02199. The Acquiring Fund and the Acquired Fund are sometimes
referred to collectively herein as the "Funds" and individually as a "Fund."
This Agreement is intended to be and is adopted as a plan of
"reorganization," as such term is used in Section 368(a) of the Internal Revenue
Code of 1986, as amended (the "Code"). The reorganization will consist of the
transfer of all of the assets of the Acquired Fund to the Acquiring Fund in
exchange solely for the issuance of Class A and Class B shares of beneficial
interest of the Acquiring Fund (the "Acquiring Fund Shares") to the Acquired
Fund and the assumption by the Acquiring Fund of all of the liabilities of the
Acquired Fund, followed by the distribution by the Acquired Fund, on or promptly
after the Closing Date hereinafter referred to, of the Acquiring Fund Shares to
the shareholders of the Acquired Fund in liquidation and termination of the
Acquired Fund as provided herein, all upon the terms and conditions set forth in
this Agreement.
In consideration of the premises of the covenants and agreements
hereinafter set forth, the parties hereto covenant and agree as follows:
1. TRANSFER OF ASSETS OF THE ACQUIRED FUND IN EXCHANGE FOR ASSUMPTION OF
LIABILITIES AND ISSUANCE OF ACQUIRING FUND SHARES; LIQUIDATION OF THE
ACQUIRED FUND
1.1 The Acquired Fund will transfer all of its assets (consisting, without
limitation, of portfolio securities and instruments, dividends and interest
receivables, cash and other assets), as set forth in the statement of assets and
liabilities referred to in Paragraph 7.2 hereof (the "Statement of Assets and
Liabilities"), to the Acquiring Fund free and clear of all liens and
encumbrances, except as otherwise provided herein, in exchange for (i) the
assumption by the Acquiring Fund of the known and unknown liabilities of the
Acquired Fund, including the liabilities set forth in the Statement of Assets
and Liabilities (the "Acquired Fund Liabilities"), which shall be assigned and
<PAGE> 81
transferred to the Acquiring Fund by the Acquired Fund and assumed by the
Acquiring Fund, and (ii) delivery by the Acquiring Fund to the Acquired Fund,
for distribution pro rata by the Acquired Fund to its Class A and Class B
shareholders in proportion to their respective ownership of Class A and Class B
shares of beneficial interest of the Acquired Fund, as of the close of business
on the closing date (the "Closing Date"), of a number of the Acquiring Fund
Shares having an aggregate net asset value equal to the value of the assets,
less such liabilities (herein referred to as the "net value of the assets"),
attributable to the corresponding class of the Acquired Fund so transferred,
assumed, assigned and delivered, all determined as provided in Paragraph 2.1
hereof and as of a date and time as specified therein. Such transactions shall
take place at the closing provided for in Paragraph 3.1 hereof (the "Closing").
All computations shall be provided by Investors Bank and Trust Company (the
"Custodian"), as custodian and pricing agent for the Acquiring Fund and the
Acquired Fund.
1.2 The Acquired Fund has provided the Acquiring Fund with a list of the
current securities holdings of the Acquired Fund as of the date of execution of
this Agreement. The Acquired Fund reserves the right to sell any of these
securities (except to the extent sales may be limited by representations made in
connection with issuance of the tax opinion provided for in paragraph 8.6
hereof) but will not, without the prior approval of the Acquiring Fund, acquire
any additional securities other than securities of the type in which the
Acquiring Fund is permitted to invest.
1.3 The Acquiring Fund and the Acquired Fund shall each bear its own
expenses in connection with the transactions contemplated by this Agreement.
1.4 On or as soon after the Closing Date as is conveniently practicable
(the "Liquidation Date"), the Acquired Fund will liquidate and distribute pro
rata to shareholders of record of the applicable class (the "Acquired Fund
shareholders"), determined as of the close of regular trading on the New York
Stock Exchange on the Closing Date, the Acquiring Fund Shares received by the
Acquired Fund pursuant to Paragraph 1.1 hereof. Such liquidation and
distribution will be accomplished by the transfer of the Acquiring Fund Shares
then credited to the account of the Acquired Fund on the books of the Acquiring
Fund, to open accounts on the share records of the Acquiring Fund in the names
of the Acquired Fund shareholders and representing the respective pro rata
number and class of Acquiring Fund Shares due such shareholders. Acquired Fund
shareholders who own Class A shares of the Acquired Fund will receive Class A
Acquiring Fund Shares, and Acquired Fund shareholders who own Class B shares of
the Acquired Fund will receive Class B Acquiring Fund Shares. If shares of the
Acquired Fund acquired in an exchange from another mutual fund are subject
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to a contingent deferred sales charge ("CDSC") immediately prior to the
Closing, the successor Acquiring Fund Shares received in the Reorganization
shall be subject to the same CDSC, including all terms and conditions for
computing and applying such CDSC. The Acquiring Fund shall not issue
certificates representing Acquiring Fund Shares in connection with such
exchange.
1.5 The Acquired Fund shareholders holding certificates representing their
ownership of shares of beneficial interest of the Acquired Fund shall surrender
such certificates or deliver an affidavit with respect to lost certificates in
such form and accompanied by such surety bonds as the Acquired Fund may require
(collectively, an "Affidavit"), to John Hancock Investor Services Corporation
prior to the Closing Date. Any Acquired Fund share certificate which remains
outstanding on the Closing Date shall be deemed to be cancelled, shall no longer
evidence ownership of shares of beneficial interest of the Acquired Fund and
shall evidence ownership of Acquiring Fund Shares. Unless and until any such
certificate shall be so surrendered or an Affidavit relating thereto shall be
delivered, dividends and other distributions payable by the Acquiring Fund
subsequent to the Liquidation Date with respect to Acquiring Fund Shares shall
be paid to the holder of such certificate(s), but such shareholders may not
redeem or transfer Acquiring Fund Shares received in the Reorganization. The
Acquiring Fund will not issue stock certificates in the Reorganization.
1.6 Any transfer taxes payable upon issuance of Acquiring Fund Shares in a
name other than the registered holder of the Acquired Fund Shares on the books
of the Acquired Fund as of that time shall, as a condition of such issuance and
transfer, be paid by the person to whom such Acquiring Fund Shares are to be
issued and transferred.
1.7 The existence of the Acquired Fund shall be terminated as promptly as
practicable following the Liquidation Date.
1.8 Any reporting responsibility of the Acquired Fund, including, but not
limited to, the responsibility for filing of regulatory reports, tax returns, or
other documents with the Securities and Exchange Commission (the "Commission"),
any state securities commissions, and any federal, state or local tax
authorities or any other relevant regulatory authority, is and shall remain the
responsibility of the Acquired Fund.
2. VALUATION
2.1 The net asset values of the Class A and Class B Acquiring Fund Shares
and the net values of the assets and
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liabilities of the Acquired Fund attributable to its Class A and Class B shares
to be transferred or assumed shall, in each case, be determined as of the close
of business (4:00 p.m. Boston time) on the Closing Date. The net asset values of
the Class A and Class B Acquiring Fund Shares shall be computed by the Custodian
in the manner set forth in the Acquiring Fund's Declaration of Trust, as
amended, or By-laws and the Acquiring Fund's then-current prospectus and
statement of additional information and shall be computed in each case to not
fewer than four decimal places. The net values of the assets of the Acquired
Fund attributable to its Class A and Class B shares to be transferred shall be
computed by the Custodian by calculating the value of the assets of each class
transferred by the Acquired Fund and by subtracting therefrom the amount of the
liabilities of each respective class assigned and transferred to and assumed by
the Acquiring Fund on the Closing Date, said assets and liabilities to be valued
in the manner set forth in the Acquired Fund's then-current prospectus and
statement of additional information and shall be computed in each case to not
fewer than four decimal places.
2.2 The number of shares of each class of Acquiring Fund Shares to be
issued (including fractional shares, if any) in exchange for the Acquired Fund's
assets shall be determined by dividing the value of the Acquired Fund's assets
attributable to a class, less the liabilities attributable to that class assumed
by the Acquiring Fund, by the Acquiring Fund's net asset value per share of the
same class, all as determined in accordance with Paragraph 2.1 hereof.
2.3 All computations of value shall be made by the Custodian in accordance
with its regular practice as pricing agent for the Funds.
3. CLOSING AND CLOSING DATE
3.1 The Closing Date shall be May 3, 1996 or such other date on or
before December 31, 1996 as the parties may agree. The Closing shall be held as
of 5:00 p.m. at the offices of the Funds, 101 Huntington Avenue, Boston,
Massachusetts 02199, or at such other time and/or place as the parties may
agree.
3.2 Portfolio securities that are not held in book-entry form in the
name of the Custodian as record holder for the Acquired Fund shall be presented
by the Acquired Fund to the Custodian for examination no later than five
business days preceding the Closing Date. Portfolio securities which are not
held in book-entry form shall be delivered by the Acquired Fund to the
Custodian for the account of the Acquiring Fund on the Closing
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Date, duly endorsed in proper form for transfer, in such condition as
to constitute good delivery thereof in accordance with the custom of brokers,
and shall be accompanied by all necessary federal and state stock transfer
stamps or a check for the appropriate purchase price thereof. Portfolio
securities held of record by the Custodian in book-entry form on behalf of the
Acquired Fund shall be delivered to the Acquiring Fund by the Custodian by
recording the transfer of beneficial ownership thereof on its records. The cash
delivered shall be in the form of currency or by the Custodian crediting the
Acquiring Fund's account maintained with the Custodian with immediately
available funds.
3.3 In the event that on the Closing Date (a) the New York Stock Exchange
shall be closed to trading or trading thereon shall be restricted or (b) trading
or the reporting of trading on said Exchange or elsewhere shall be disrupted so
that accurate appraisal of the value of the net assets of the Acquiring Fund or
the Acquired Fund is impracticable, the Closing Date shall be postponed until
the first business day after the day when trading shall have been fully resumed
and reporting shall have been restored; provided that if trading shall not be
fully resumed and reporting restored on or before December 31, 1996, this
Agreement may be terminated by the Acquiring Fund or by the Acquired Fund upon
the giving of written notice to the other party.
3.4 The Acquired Fund shall deliver at the Closing a list of the names,
addresses, federal taxpayer identification numbers and backup withholding and
nonresident alien withholding status of the Acquired Fund shareholders and the
number of outstanding shares of each class of beneficial interest of the
Acquired Fund owned by each such shareholder, all as of the close of business on
the Closing Date, certified by its Treasurer, Secretary or other authorized
officer (the "Shareholder List"). The Acquiring Fund shall issue and deliver to
the Acquired Fund a confirmation evidencing the Acquiring Fund Shares to be
credited on the Closing Date, or provide evidence satisfactory to the Acquired
Fund that such Acquiring Fund have been credited to the Acquired Fund's account
on the books of the Acquiring Fund. At the Closing, each party shall deliver to
the other such bills of sale, checks, assignments, stock certificates, receipts
or other documents as such other party or its counsel may reasonably request.
4. REPRESENTATIONS AND WARRANTIES
4.1 The Acquired Fund represents, warrants and covenants to the Acquiring
Fund as follows:
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<PAGE> 85
(a) The Acquired Fund is a voluntary association with transferable
shares of the type commonly referred to as a business trust, duly
organized and validly existing under the laws of The Commonwealth of
Massachusetts and has the power to own all of its properties and assets
and, subject to approval by the shareholders of the Acquired Fund, to
carry out the transactions contemplated by this Agreement. The Acquired
Fund is not required to qualify to do business in any jurisdiction in
which it is not so qualified or where failure to qualify would subject
it to any material liability or disability. The Acquired Fund has all
necessary federal, state and local authorizations to own all of its
properties and assets and to carry on its business as now being
conducted;
(b) The Acquired Fund is a registered investment company
classified as a management company and its registration with the
Commission as an investment company under the Investment Company Act
of 1940, as amended (the "1940 Act"), is in full force and effect. The
Acquired Fund is a diversified fund;
(c) The Acquired Fund is not, and the execution, delivery and
performance of its obligations under this Agreement will not result, in
violation of any provision of the Acquired Fund's Declaration of Trust,
as amended, or By-Laws or of any agreement, indenture, instrument,
contract, lease or other undertaking to which the Acquired Fund is a
party or by which it is bound;
(d) Except as otherwise disclosed in writing and accepted by the
Acquiring Fund, no material litigation or administrative proceeding or
investigation of or before any court or governmental body is currently
pending or threatened against the Acquired Fund or any of the Acquired
Fund's properties or assets. The Acquired Fund knows of no facts which
might form the basis for the institution of such proceedings, and the
Acquired Fund is not a party to or subject to the provisions of any
order, decree or judgment of any court or governmental body which
materially and adversely affects the Acquired Fund's business or its
ability to consummate the transactions herein contemplated;
(e) The Acquired Fund has no material contracts or other
commitments (other than this Agreement or agreements for the purchase
of securities entered into in the ordinary course of business and
consistent with its obligations under this Agreement) which will not
be terminated without liability to the Acquired Fund at or prior to
the Closing Date;
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<PAGE> 86
(f) The audited statement of assets and liabilities, including the
schedule of investments, of the Acquired Fund as of December 31, 1995
and the related statement of operations and the statement of changes in
net assets for the years ended December 31, 1995 and 1994 (copies of
which have been furnished to the Acquiring Fund) present fairly in all
material respects the financial condition of the Acquired Fund as of
December 31, 1995 and the results of its operations for the period then
ended in accordance with generally accepted accounting principles
consistently applied, and there were no known actual or contingent
liabilities of the Acquired Fund as of the respective dates thereof not
disclosed therein;
(g) Since December 31, 1995, there has not been any material
adverse change in the Acquired Fund's financial condition, assets,
liabilities, or business other than changes occurring in the ordinary
course of business, or any incurrence by the Acquired Fund of
indebtedness maturing more than one year from the date such
indebtedness was incurred, except as otherwise disclosed to and
accepted by the Acquiring Fund;
(h) At the date hereof and by the Closing Date, all federal,
state and other tax returns and reports, including information returns
and payee statements, of the Acquired Fund required by law to have
been filed or furnished by such dates shall have been filed or
furnished, and all federal, state and other taxes, interest and
penalties shall have been paid so far as due, or provision shall have
been made for the payment thereof, and to the best of the Acquired
Fund's knowledge no such return is currently under audit and no
assessment has been asserted with respect to such returns or reports;
(i) The Acquired Fund has elected to be treated as a regulated
investment company for federal income tax purposes, has qualified as
such for each taxable year of its operation and will qualify as such as
of the Closing Date with respect to its final taxable year ending on
the Closing Date;
(j) The authorized capital of the Acquired Fund consists of an
unlimited number of shares of beneficial interest, no par value. All
issued and outstanding shares of beneficial interest of the Acquired
Fund are, and at the Closing Date will be, duly and validly issued and
outstanding, fully paid and nonassessable by the Acquired Fund. All of
the issued and outstanding shares of beneficial interest of the
Acquired Fund will, at the time of Closing, be held by the persons and
in the amounts and classes set
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<PAGE> 87
forth in the Shareholder List submitted to the Acquiring Fund pursuant
to Paragraph 3.4 hereof. The Acquired Fund does not have outstanding
any options, warrants or other rights to subscribe for or purchase any
of its shares of beneficial interest, nor is there outstanding any
security convertible into any of its shares of beneficial interest;
(k) At the Closing Date, the Acquired Fund will have good and
marketable title to the assets to be transferred to the Acquiring Fund
pursuant to Paragraph 1.1 hereof, and full right, power and authority
to sell, assign, transfer and deliver such assets hereunder, and upon
delivery and payment for such assets, the Acquiring Fund will acquire
good and marketable title thereto subject to no restrictions on the
full transfer thereof, including such restrictions as might arise under
the Securities Act of 1933, as amended (the "1933 Act");
(l) The execution, delivery and performance of this Agreement have
been duly authorized by all necessary action on the part of the
Acquired Fund, and this Agreement constitutes a valid and binding
obligation of the Acquired Fund enforceable in accordance with its
terms, subject to the approval of the Acquired Fund's shareholders;
(m) The information to be furnished by the Acquired Fund to the
Acquiring Fund for use in applications for orders, registration
statements, proxy materials and other documents which may be necessary
in connection with the transactions contemplated hereby shall be
accurate and complete and shall comply in all material respects with
federal securities and other laws and regulations thereunder applicable
thereto;
(n) The proxy statement of the Acquired Fund (the "Proxy
Statement") to be included in the Registration Statement referred to
in Paragraphs 4.2(c) and 5.7 hereof (other than written information
furnished by the Acquiring Fund for inclusion therein, as covered by
the Acquiring Fund's warranty in Paragraph 4.2(m) hereof), on the
effective date of the Registration Statement, on the date of the
meeting of the Acquired Fund shareholders and on the Closing Date,
shall not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances under which
such statements were made, not misleading;
(o) No consent, approval, authorization or order of any court or
governmental authority is required for the
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<PAGE> 88
consummation by the Acquired Fund of the transactions contemplated by
this Agreement;
(p) All of the issued and outstanding shares of beneficial
interest of the Acquired Fund have been offered for sale and sold in
conformity with all applicable federal and state securities laws;
(q) The prospectus of the Acquired Fund, dated May 1, 1995 as
supplemented December 11, 1995 (the "Acquired Fund Prospectus"),
previously furnished to the Acquiring Fund, does not contain any
untrue statements of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements
therein, in light of the circumstances in which they were made, not
misleading.
4.2 The Acquiring Fund represents, warrants and covenants to the
Acquired Fund as follows:
(a) The Acquiring Fund is a business trust duly organized,
validly existing and in good standing under The Commonwealth of
Massachusetts and has the power to own all of its properties and assets
and to carry out the Agreement. The Acquiring Fund is not required to
qualify to do business in any jurisdiction in which it is not so
qualified or where failure to qualify would subject it to any material
liability or disability. The Acquiring Fund has all necessary federal,
state and local authorizations to own all of its properties and assets
and to carry on its business as now being conducted;
(b) The Acquiring Fund is a registered investment company
classified as a management company and its registration with the
Commission as an investment company under the 1940 Act is in full force
and effect. The Acquiring Fund is a diversified investment company
under the 1940 Act;
(c) The prospectus (the "Acquiring Fund Prospectus") and
statement of additional information for Class A and Class B shares of
the Acquiring Fund, each dated May 1, 1995, and any amendments or
supplements thereto on or prior to the Closing Date, and the
Registration Statement on Form N-14 to be filed in connection with this
Agreement (the "Registration Statement") (other than written
information furnished by the Acquired Fund for inclusion therein, as
covered by the Acquired Fund's warranty in Paragraph 4.1(m) hereof)
will conform in all material respects to the applicable requirements of
the 1933 Act and the 1940 Act and the rules and regulations of the
Commission thereunder, the Acquiring
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Fund Prospectus does not include any untrue statement of a material
fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading and the
Registration Statement will not include any untrue statement of
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(d) At the Closing Date, the Acquiring Fund will have good and
marketable title to the assets of the Acquiring Fund;
(e) The Acquiring Fund is not, and the execution, delivery and
performance of its obligations under this Agreement will not result, in
violation of any provisions of the Acquiring Fund's Declaration of
Trust, as amended, or By-laws or of any agreement, indenture,
instrument, contract, lease or other undertaking to which the Acquiring
Fund is a party or by which the Acquiring Fund is bound;
(f) Except as otherwise disclosed in writing and accepted by
the Acquired Fund, no material litigation or administrative proceeding
or investigation of or before any court or governmental body is
currently pending or threatened against the Acquiring Fund or any of
the Acquiring Fund's properties or assets. The Acquiring Fund knows of
no facts which might form the basis for the institution of such
proceedings, and the Acquiring Fund is not a party to or subject to the
provisions of any order, decree or judgment of any court or
governmental body which materially and adversely affects the Acquiring
Fund's business or its ability to consummate the transactions herein
contemplated;
(g) The audited statement of assets and liabilities, including
the schedule of investments, of the Acquiring Fund as of December 31,
1995 and the related statement of operations and the statement of
changes in net assets for the years ended December 31, 1995 and 1994
(copies of which have been furnished to the Acquired Fund), present
fairly in all material respects the financial condition of the
Acquiring Fund as of December 31, 1995 and the results of its
operations for the period then ended in accordance with generally
accepted accounting principles consistently applied, and there were no
known actual or contingent liabilities of the Acquiring Fund as of the
respective dates thereof not disclosed herein;
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(h) Since December 31, 1995, there has not been any material
adverse change in the Acquiring Fund's financial condition, assets,
liabilities or business other than changes occurring in the ordinary
course of business, or any incurrence by the Acquiring Fund of
indebtedness maturing more than one year from the date such
indebtedness was incurred, except as disclosed to and accepted by the
Acquired Fund;
(i) The Acquiring Fund has elected to be treated as a
regulated investment company for federal income tax purposes, has
qualified as such for each taxable year of its operation and will
qualify as such as of the Closing Date;
(j) The authorized capital of the Acquiring Fund consists of
an unlimited number of shares of beneficial interest, no par value. All
issued and outstanding shares of beneficial interest of the Acquiring
Fund are, and at the Closing Date will be, duly and validly issued and
outstanding, fully paid and nonassessable by the Acquiring Fund. The
Acquiring Fund does not have outstanding any options, warrants or other
rights to subscribe for or purchase any of its shares of beneficial
interest, nor is there outstanding any security convertible into any of
its shares of beneficial interest;
(k) The execution, delivery and performance of this Agreement
has been duly authorized by all necessary action on the part of the
Acquiring Fund, and this Agreement constitutes a valid and binding
obligation of the Acquiring Fund enforceable in accordance with its
terms;
(l) The Acquiring Fund Shares to be issued and delivered to
the Acquired Fund pursuant to the terms of this Agreement, when so
issued and delivered, will be duly and validly issued shares of
beneficial interest of the Acquiring Fund and will be fully paid and
nonassessable by the Acquiring Fund;
(m) The information to be furnished by the Acquiring Fund for
use in applications for orders, registration statements, proxy
materials and other documents which may be necessary in connection with
the transactions contemplated hereby shall be accurate and complete and
shall comply in all material respects with federal securities and other
laws and regulations applicable thereto; and
(n) No consent, approval, authorization or order of any court or
governmental authority is required for the consummation by the
Acquiring Fund of the transactions
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contemplated by the Agreement, except for the registration of the
Acquiring Fund Shares under the 1933 Act, the 1940 Act and under state
securities laws.
5. COVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND
5.1 Except as expressly contemplated herein to the contrary, the Acquired
Fund and the Acquiring Fund will operate their respective businesses in the
ordinary course between the date hereof and the Closing Date, it being
understood that such ordinary course of business will include customary
dividends and distributions and any other distributions necessary or desirable
to avoid federal income or excise taxes.
5.2 The Acquired Fund will call a meeting of the Acquired Fund
shareholders to consider and act upon this Agreement and to take all other
action necessary to obtain approval of the transactions contemplated herein.
5.3 The Acquired Fund covenants that the Acquiring Fund Shares to be
issued hereunder are not being acquired by the Acquired Fund for the purpose of
making any distribution thereof other than in accordance with the terms of this
Agreement.
5.4 The Acquired Fund will provide such information within its possession
or reasonably obtainable as the Acquiring Fund requests concerning the
beneficial ownership of the Acquired Fund's shares of beneficial interest.
5.5 Subject to the provisions of this Agreement, the Acquiring Fund
and the Acquired Fund each shall take, or cause to be taken, all action, and do
or cause to be done, all things reasonably necessary, proper or advisable to
consummate the transactions contemplated by this Agreement.
5.6 The Acquired Fund shall furnish to the Acquiring Fund on the Closing
Date the Statement of Assets and Liabilities of the Acquired Fund as of the
Closing Date, which statement shall be prepared in accordance with generally
accepted accounting principles consistently applied and shall be certified by
the Acquired Fund's Treasurer or Assistant Treasurer. As promptly as practicable
but in any case within 60 days after the Closing Date, the Acquired Fund shall
furnish to the Acquiring Fund, in such form as is reasonably satisfactory to the
Acquiring Fund, a statement of the earnings and profits of the Acquired Fund for
federal income tax purposes and of any capital loss carryovers and other items
that will be carried over to the Acquiring Fund as a result of Section 381 of
the Code, and which statement will be certified by the President of the Acquired
Fund.
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5.7 The Acquiring Fund will prepare and file with the Commission the
Registration Statement in compliance with the 1933 Act and the 1940 Act in
connection with the issuance of the Acquiring Fund Shares as contemplated
herein.
5.8 The Acquired Fund will prepare a Proxy Statement, to be included
in the Registration Statement in compliance with the 1933 Act, the Securities
Exchange Act of 1934, as amended (the "1934 Act"), and the 1940 Act and the
rules and regulations thereunder (collectively, the "Acts") in connection with
the special meeting of shareholders of the Acquired Fund to consider approval
of this Agreement.
6. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRED FUND
The obligations of the Acquired Fund to complete the transactions
provided for herein shall be, at its election, subject to the performance by
the Acquiring Fund of all the obligations to be performed by it hereunder on or
before the Closing Date, and, in addition thereto, the following further
conditions:
6.1 All representations and warranties of the Acquiring Fund contained
in this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force and
effect as if made on and as of the Closing Date; and
6.2 The Acquiring Fund shall have delivered to the Acquired Fund a
certificate executed in its name by its President or Vice President and its
Treasurer or Assistant Treasurer, in form and substance satisfactory to the
Acquired Fund and dated as of the Closing Date, to the effect that the
representations and warranties of the Acquiring Fund made in this Agreement are
true and correct at and as of the Closing Date, except as they may be affected
by the transactions contemplated by this Agreement, and as to such other
matters as the Acquired Fund shall reasonably request.
7. CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND
The obligations of the Acquiring Fund to complete the transactions provided
for herein shall be, at its election, subject to the performance by the Acquired
Fund of all the obligations to be performed by it hereunder on or before the
Closing Date and, in addition thereto, the following conditions:
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7.1 All representations and warranties of the Acquired Fund contained
in this Agreement shall be true and correct in all material respects as of the
date hereof and, except as they may be affected by the transactions
contemplated by this Agreement, as of the Closing Date with the same force and
effect as if made on and as of the Closing Date;
7.2 The Acquired Fund shall have delivered to the Acquiring Fund the
Statement of Assets and Liabilities of the Acquired Fund, together with a list
of its portfolio securities showing the federal income tax bases and holding
periods of such securities, as of the Closing Date, certified by the Treasurer
or Assistant Treasurer of the Acquired Fund;
7.3 The Acquired Fund shall have delivered to the Acquiring Fund on
the Closing Date a certificate executed in the name of the Acquired Fund by a
President or Vice President and a Treasurer or Assistant Treasurer of the
Acquired Fund, in form and substance satisfactory to the Acquiring Fund and
dated as of the Closing Date, to the effect that the representations and
warranties of the Acquired Fund in this Agreement are true and correct at and
as of the Closing Date, except as they may be affected by the transactions
contemplated by this Agreement, and as to such other matters as the Acquiring
Fund shall reasonably request; and
7.4 At or prior to the Closing Date, the Acquired Fund's investment
adviser, or an affiliate thereof, shall have made all payments, or applied all
credits, to the Acquired Fund required by any applicable contractual or
state-imposed expense limitation.
8. FURTHER CONDITIONS PRECEDENT TO OBLIGATIONS OF THE ACQUIRING FUND AND
THE ACQUIRED FUND
The obligations of the Acquiring Fund and the Acquired Fund hereunder are
each subject to the further conditions that on or before the Closing Date:
8.1 The Agreement and the transactions contemplated herein shall have been
approved by the requisite vote of the holders of the outstanding shares of
beneficial interest of the Acquired Fund in accordance with the provisions of
the Acquired Fund's Declaration of Trust, as amended, and By-Laws, and certified
copies of the resolutions evidencing such approval by the Acquired Fund's
shareholders shall have been delivered by the Acquired Fund to the Acquiring
Fund;
B-14
<PAGE> 94
8.2 On the Closing Date no action, suit or other proceeding shall be
pending before any court or governmental agency in which it is sought to
restrain or prohibit, or obtain changes or other relief in connection with, this
Agreement or the transactions contemplated herein;
8.3 All consents of other parties and all other consents, orders and
permits of federal, state and local regulatory authorities (including those of
the Commission and of state Blue Sky and securities authorities, including
"no-action" positions of such federal or state authorities) deemed necessary by
the Acquired Fund and the Acquiring Fund to permit consummation, in all material
respects, of the transactions contemplated hereby shall have been obtained,
except where failure to obtain any such consent, order or permit would not
involve a risk of a material adverse effect on the assets or properties of the
Acquiring Fund or the Acquired Fund, provided that either party hereto may waive
any such conditions for itself;
8.4 The Registration Statement shall have become effective under the 1933
Act and the 1940 Act and no stop orders suspending the effectiveness thereof
shall have been issued and, to the best knowledge of the parties hereto, no
investigation or proceeding for that purpose shall have been instituted or be
pending, threatened or contemplated under the 1933 Act or the 1940 Act;
8.5 The Acquired Fund shall have distributed to its shareholders all of
its investment company taxable income (as defined in Section 852(b)(2) of the
Code) for its taxable year ending on the Closing Date, all of the excess of its
interest income excludable from gross income under Section 103(a) of the Code
over its deductions disallowed under Sections 265 and/or 171(a)(2) of the Code
for its taxable year ending on the Closing Date, and all of its net capital gain
(as such term is used in Section 852(b)(3)(C) of the Code), after reduction by
any available capital loss carryforward, for its taxable year ending on the
Closing Date; and
8.6 The parties shall have received an opinion of Messrs. Hale and Dorr,
satisfactory to the Acquired Fund and the Acquiring Fund, substantially to the
effect that for federal income tax purposes:
(a) The acquisition by the Acquiring Fund of all of the assets of the
Acquired Fund solely in exchange for the issuance of Acquiring Fund Shares
to the Acquired Fund and the assumption of all of the Acquired Fund
Liabilities by the Acquiring Fund, followed by the distribution by the
Acquired Fund, in liquidation of the Acquired Fund, of Acquiring Fund
Shares to the shareholders of the Acquired Fund in exchange
B-15
<PAGE> 95
for their shares of beneficial interest of the Acquired Fund and the
termination of the Acquired Fund, will constitute a "reorganization"
within the meaning of Section 368(a) of the Code, and the Acquired Fund
and the Acquiring Fund will each be "a party to a reorganization"
within the meaning of Section 368(b) of the Code;
(b) No gain or loss will be recognized by the Acquired Fund
upon (i) the transfer of all of its assets to the Acquiring Fund solely
in exchange for the issuance of Acquiring Fund Shares to the Acquired
Fund and the assumption of all of the Acquired Fund Liabilities by the
Acquiring Fund; and (ii) the distribution by the Acquired Fund of such
Acquiring Fund Shares to the shareholders of the Acquired Fund;
(c) No gain or loss will be recognized by the Acquiring Fund
upon the receipt of the assets of the Acquired Fund solely in exchange
for the issuance of the Acquiring Fund Shares to the Acquired Fund and
the assumption of all of the Acquired Fund Liabilities by the Acquiring
Fund;
(d) The basis of the assets of the Acquired Fund acquired by
the Acquiring Fund will be, in each instance, the same as the basis of
those assets in the hands of the Acquired Fund immediately prior to the
transfer;
(e) The tax holding period of the assets of the Acquired Fund
in the hands of the Acquiring Fund will, in each instance, include the
Acquired Fund's tax holding period for those assets;
(f) The shareholders of the Acquired Fund will not recognize
gain or loss upon the exchange of all of their shares of beneficial
interest of the Acquired Fund solely for Acquiring Fund Shares as part
of the transaction;
(g) The basis of the Acquiring Fund Shares received by the
Acquired Fund shareholders in the transaction will be the same as the
basis of the shares of beneficial interest of the Acquired Fund
surrendered in exchange therefor; and
(h) The tax holding period of the Acquiring Fund Shares
received by the Acquired Fund shareholders will include, for each
shareholder, the tax holding period for the shares of beneficial
interest of the Acquired Fund surrendered in exchange therefor,
provided that such Acquired Fund shares were held as capital assets on
the date of the exchange.
B-16
<PAGE> 96
The Acquiring Fund and the Acquired Fund agree to make and provide
representations with respect to the Acquiring Fund and the Acquired Fund,
respectively, which are reasonably necessary to enable Hale and Dorr to deliver
an opinion substantially as set forth in this Paragraph 8.6. Notwithstanding
anything herein to the contrary, neither the Acquired Fund nor the Acquiring
Fund may waive the conditions set forth in this Paragraph 8.6.
9. BROKERAGE FEES AND EXPENSES
9.1 The Acquiring Fund and the Acquired Fund represent and warrant to the
Acquired Fund and the Acquiring Fund, respectively, that there are no brokers or
finders entitled to receive any payments in connection with the transactions
provided for herein.
9.2 The Acquiring Fund and the Acquired Fund shall each be liable solely
for its own expenses incurred in connection with entering into and carrying out
the provisions of this Agreement whether or not the transactions contemplated
hereby are consummated.
10. ENTIRE AGREEMENT; SURVIVAL OF WARRANTIES
10.1 The Acquiring Fund and the Acquired Fund agree that neither party has
made any representation, warranty or covenant not set forth herein or referred
to in Paragraph 4 hereof and that this Agreement constitutes the entire
agreement between the parties.
10.2 The representations, warranties and covenants contained in this
Agreement or in any document delivered pursuant hereto or in connection herewith
shall survive the consummation of the transactions contemplated hereunder.
11. TERMINATION
11.1 This Agreement may be terminated by the mutual agreement of the
Acquiring Fund and the Acquired Fund. In addition, either party may at its
option terminate this Agreement at or prior to the Closing Date:
(a) because of a material breach by the other of any
representation, warranty, covenant or agreement contained herein to be
performed at or prior to the Closing Date;
(b) because of a condition herein expressed to be precedent to
the obligations of the terminating party which
B-17
<PAGE> 97
has not been met and which reasonably appears will not or cannot be met;
(c) by resolution of the Acquiring Fund's Board of Trustees if
circumstances should develop that, in the good faith opinion of such
Board, make proceeding with the Agreement not in the best interests of
the Acquiring Fund's shareholders; or
(d) by resolution of the Acquired Fund's Board of Trustees if
circumstances should develop that, in the good faith opinion of such
Board, make proceeding with the Agreement not in the best interests of
the Acquired Fund's shareholders.
11.2 In the event of any such termination, there shall be no liability for
damages on the part of the Acquiring Fund or the Acquired Fund, or the Trustees
or officers of either Fund, but each party shall bear the expenses incurred by
it incidental to the preparation and carrying out of this Agreement.
12. AMENDMENTS
This Agreement may be amended, modified or supplemented in such manner as
may be mutually agreed upon by the authorized officers of the Acquired Fund and
the Acquiring Fund. However, following the meeting of shareholders of the
Acquired Fund held pursuant to Paragraph 5.2 of this Agreement, no such
amendment may have the effect of changing the provisions regarding the method
for determining the number of Acquiring Fund Shares to be received by the
Acquired Fund shareholders under this Agreement to the detriment of such
shareholders without their further approval; provided that nothing contained in
this Article 12 shall be construed to prohibit the parties from amending this
Agreement to change the Closing Date.
13. NOTICES
Any notice, report, statement or demand required or permitted by any
provisions of this Agreement shall be in writing and shall be given by prepaid
telegraph, telecopy or certified mail addressed to the Acquiring Fund or to the
Acquired Fund, each at 101 Huntington Avenue, Boston, Massachusetts 02199,
Attention: President, and, in either case, with copies to Hale and Dorr, 60
State Street, Boston, Massachusetts 02109, Attention: Pamela J. Wilson, Esq.
B-18
<PAGE> 98
14. HEADINGS; COUNTERPARTS; GOVERNING LAW; ASSIGNMENT
14.1 The article and paragraph headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
14.2 This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original.
14.3 This Agreement shall be governed by and construed in accordance with
the laws of The Commonwealth of Massachusetts.
14.4 This Agreement shall bind and inure to the benefit of the parties
hereto and their respective successors and assigns, but no assignment or
transfer hereof or of any rights or obligations hereunder shall be made by any
party without the prior written consent of the other party. Nothing herein
expressed or implied is intended or shall be construed to confer upon or give
any person, firm or corporation, other than the parties hereto and their
respective successors and assigns, any rights or remedies under or by reason of
this Agreement.
B-19
<PAGE> 99
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed as of the date first set forth above by its President or Vice
President and has caused its corporate seal to be affixed hereto.
JOHN HANCOCK TAX-FREE BOND FUND
By: /s/ Anne C. Hodsdon
------------------------------
Name: Anne C. Hodsdon
Title: President
JOHN HANCOCK TAX-EXEMPT INCOME FUND
By: /s/ Thomas H. Drohan
------------------------------
Name: Thomas H. Drohan
Title: Senior Vice President
B-20
<PAGE> 100
JOHN HANCOCK TAX-EXEMPT INCOME FUND
101 HUNTINGTON AVENUE, BOSTON, MASSACHUSETTS 02199
SPECIAL MEETING OF THE SHAREHOLDERS - MAY 2, 1996
PROXY SOLICITATION BY THE BOARD OF TRUSTEES
The undersigned, revoking previous proxies, hereby appoint(s) Edward J.
Boudreau, Jr., Thomas H. Drohan and James B. Little, with full power of
substitution in each, to vote all the shares of beneficial interest of John
Hancock Tax-Exempt Income fund ("Tax-Exempt Income Fund" or the "Fund") which
the undersigned is (are) entitled to vote at the Special Meeting of
Shareholders (the "Meeting") of Tax-Exempt Income Fund to be held at 101
Huntington Avenue, Boston, Massachusetts, on May 2, 1996 at 9:00 a.m., Boston
time, and at any adjournment of the Meeting. All powers may be exercised by a
majority of said proxy holders or substitutes voting or acting, or, if only one
votes and acts, then by that one. Receipt of the Proxy Statement dated March
18, 1996 is hereby acknowledged. If not revoked, this proxy shall be voted:
PLEASE SIGN, DATE AND RETURN
PROMPTLY IN ENCLOSED ENVELOPE
Date ______________________, 1996
NOTE: Signature(s) should
agree with name(s) printed
herein. When signing as
attorney, executor,
administrator, trustee or
guardian, please give your full
title as such. If a
corporation, please sign in
full corporate name by
president or other authorized
officer. If a partnership,
please sign in partnership
name by authorized person.
------------------------------------
Signature(s)
<PAGE> 101
VOTE THIS PROXY CARD TODAY! YOUR PROMPT RESPONSE WILL SAVE YOUR FUND THE
EXPENSE OF ADDITIONAL MAILINGS.
THIS PROXY SHALL BE VOTED IN FAVOR OF (FOR) PROPOSAL 1 IF NO
SPECIFICATION IS MADE BELOW. AS TO ANY OTHER MATTER, SAID PROXY OR PROXIES
SHALL VOTE IN ACCORDANCE WITH THEIR BEST JUDGEMENT. PLEASE VOTE BY FILLING IN
THE APPROPRIATE BOXES BELOW, AS SHOWN, USING BLUE OR BLACK INK OR DARK PENCIL.
DO NOT USE RED INK.
(1) To approve an Agreement and Plan of Reorganization
between John Hancock Tax-Free Bond Fund and John Hancock Tax-Exempt
Income Fund, providing for John Hancock Tax-Free Bond Fund's
acquisition of all John Hancock Tax-Exempt Income Fund's assets in
exchange solely for assumption of John Hancock Tax-Exempt Income Fund's
liabilities, and the issuance of Class A shares and Class B shares of
John Hancock Tax-Free Bond Fund to John Hancock Tax-Exempt Income Fund
for distribution to its shareholders.
FOR / / AGAINST / / ABSTAIN / /
PLEASE DO NOT FORGET TO SIGN THE REVERSE SIDE OF THIS CARD.
<PAGE> 102
PART B
STATEMENT OF ADDITIONAL INFORMATION
JOHN HANCOCK TAX-FREE BOND FUND
March 18, 1996
This Statement of Additional Information is not a prospectus. It should be
read in conjunction with the related Proxy Statement and Prospectus (also dated
March 18, 1996) relating to Class A and Class B shares of John Hancock Tax-Free
Bond Fund ("Tax-Free Bond Fund") to be issued in exchange for all of the net
assets of John Hancock Tax-Exempt Income Fund ("Tax-Exempt Income Fund").
Please retain this Statement of Additional Information for future reference.
A copy of the Proxy Statement and Prospectus can be obtained free of charge by
calling Shareholder Services at 1-800-225-5291 or by written request to Tax-
Free Bond Fund at 101 Huntington Avenue, Boston, Massachusetts 02199.
<TABLE>
TABLE OF CONTENTS
<CAPTION>
Page
----
<S> <C>
Introduction. . . . . . . . . . . . . . . . . . . . . . . . 3
Additional Information About Tax-Free Bond Fund . . . . . . 3
General Information and History
Investment Objective and Policies
Management of Tax-Free Bond Fund
Control Persons and Principal Holders of Shares
Investment Advisory and Other Services
Brokerage Allocation and Other Practices
Common Stock
Purchase, Redemption and Pricing of Tax-Free Bond Fund Stock
Underwriters
Calculation of Performance Data
Financial Statements
Additional Information about Tax-Exempt Income Fund . . . . 5
General Information and History
Investment Objective and Policies
Management of Tax-Exempt Income Fund
Investment Advisory and Other Services
Brokerage Allocation and Other Practices
Shares of Beneficial Interest
Purchase, Redemption and Pricing of
Tax-Exempt Income Fund Shares
Underwriters
Calculation of Performance Data
Financial Statements
</TABLE>
<PAGE> 103
EXHIBITS
A - Statement of Additional Information, dated May 1, 1995, of John Hancock
Tax-Free Bond Fund including audited financial statements as of December
31, 1995.
B - Statement of Additional Information, dated May 1, 1995, of John Hancock
Tax-Exempt Income Fund including audited financial statements as of
December 31, 1995.
C - Pro Forma Combined Financial Statements at December 31, 1995 and for the
period then ended of Tax-Free Bond Fund and Tax-Exempt Income Fund.
-2-
<PAGE> 104
INTRODUCTION
------------
This Statement of Additional Information is intended to supplement the
information provided in a Proxy Statement and Prospectus dated March 18, 1996
(the "Proxy Statement and Prospectus"). The Proxy Statement and Prospectus has
been sent to the shareholders of Tax-Exempt Income Fund in connection with the
solicitation by the management of Tax-Exempt Income Fund of proxies to be voted
at the Special Meeting of Shareholders of Tax-Exempt Income Fund to be held on
May 2, 1996. This Statement of Additional Information incorporates by reference
the statement of additional information of Tax-Exempt Income Fund, dated May 1,
1995 (the "Tax-Exempt Income Fund SAI"), and the statement of additional
information of Tax-Free Bond Fund, dated May 1, 1995 (the "Tax-Free Bond Fund
SAI"). The Tax-Exempt Income Fund SAI and the Tax-Free Bond Fund SAI are
included with this Statement of Additional Information.
ADDITIONAL INFORMATION ABOUT TAX-FREE BOND FUND
-----------------------------------------------
General Information and History
- -------------------------------
For additional information about Tax-Free Bond Fund generally and its
history, see "Organization of the Fund" in the Tax-Free Bond Fund SAI.
Investment Objective and Policies
- ---------------------------------
For additional information about Tax-Free Bond Fund's investment
objective, policies and restrictions see "Investment Objective and Policies,"
"Certain Investment Practices" and "Investment Restrictions" in the Tax-Free
Bond Fund SAI.
Management of Tax-Free Bond Fund
- --------------------------------
For additional information about the Tax-Free Bond Fund's Board of
Trustees, officers and management personnel, see "Those Responsible for
Management" in the Tax-Free Bond Fund SAI.
Control Persons and Principal Holders of Shares
- -----------------------------------------------
For additional information about control persons of Tax-Free Bond Fund
and principal holders of common stock of Tax-Free Bond Fund see "Those
Responsible for Management" in the Tax-Free Bond Fund SAI.
-3-
<PAGE> 105
Investment Advisory and Other Services
- --------------------------------------
For additional information about Tax-Free Bond Fund's investment
adviser, custodian, transfer agent and independent accountants, see "Investment
Advisory and Other Services," "Distribution Contract," "Transfer Agent
Services," "Custody of Portfolio" and "Independent Auditors" in the Tax-Free
Bond Fund SAI.
Brokerage Allocation and Other Practices
- ----------------------------------------
For additional information about Tax-Free Bond Fund's brokerage
allocation practices, see "Brokerage Allocation" in the Tax-Free Bond Fund SAI.
Shares of Beneficial Interest
- -----------------------------
For additional information about the voting rights and other
characteristics of Tax-Free Bond Fund's shares of beneficial interest, see
"Description of the Fund's Shares" in the Tax-Free Bond Fund SAI.
Purchase, Redemption and Pricing of Tax-Free Bond Fund Shares
- -------------------------------------------------------------
For additional information about the determination of net asset value,
see "Net Asset Value" in the Tax-Free Bond Fund SAI.
Underwriters
- ------------
For additional information about Tax-Free Bond Fund's principal
underwriter and the distribution contract between the principal underwriter and
Tax-Free Bond Fund, see "Distribution Contract" in the Tax-Free Bond Fund SAI.
Calculation of Performance Data
- -------------------------------
For additional information about the investment performance of Tax-Free
Bond Fund, see "Calculation of Performance" in the Tax-Free Bond Fund SAI.
Financial Statements
- --------------------
Audited financial statements of Tax-Free Bond Fund at December 31, 1995
are attached to the Tax-Free Bond Fund SAI. The Fund's audited financial
statements at December 31, 1994 are incorporated by reference to the filing:
1994 Annual Report to Shareholders, as filed with the Securities and Exchange
Commission on March 6, 1995 (accession number: 0000950135-95-000632).
Pro Forma combined financial statements at December 31, 1995 for
Tax-Free Bond Fund as though the Reorganization had occurred on December 31,
1995 are attached hereto.
-4-
<PAGE> 106
ADDITIONAL INFORMATION ABOUT TAX-EXEMPT INCOME FUND
---------------------------------------------------
General Information and History
- -------------------------------
For additional information about Tax-Exempt Income Fund generally and
its history, see "Organization of the Fund" in the Tax-Exempt Income Fund SAI.
Investment Objectives and Policies
- ----------------------------------
For additional information about Tax-Exempt Income Fund's investment
objectives and policies, see "Investment Objective and Policies," "Certain
Investment Practices" and "Investment Restrictions" in the Tax-Exempt Income
Fund SAI.
Management of Tax-Exempt Income Fund
- ------------------------------------
For additional information about Tax-Exempt Income Fund's Board of
Trustees, officers and management personnel, see "Those Responsible for
Management" in the Tax-Exempt Income Fund SAI.
Investment Advisory and Other Services
- --------------------------------------
For additional information about Tax-Exempt Income Fund's investment
adviser, custodian, transfer agent and independent accountants, see "Investment
Advisory and Other Services," "Distribution Contract," "Transfer Agent
Services," "Custody of Portfolio" and "Independent Auditors" in the Tax-Exempt
Income Fund SAI.
Brokerage Allocation and Other Practices
- ----------------------------------------
For additional information about Tax-Exempt Income Fund's brokerage
allocation practices, see "Brokerage Allocation" in the Tax-Exempt Income Fund
SAI.
Shares of Beneficial Interest
- -----------------------------
For additional information about the voting rights and other
characteristics of Tax-Exempt Income Fund's shares of beneficial interest, see
"Description of the Fund's Shares" in the Tax-Exempt Income Fund SAI.
Purchase, Redemption and Pricing of Tax-Exempt Income Fund Shares
- -----------------------------------------------------------------
For additional information about the net asset value of Tax-Exempt
Income Fund's shares, see "Net Asset Value" in the Tax-Exempt Income Fund SAI.
-5-
<PAGE> 107
Underwriters
- ------------
For additional information about Tax-Exempt Income Fund's principal
underwriter and the distribution contract between the principal underwriter and
Tax-Exempt Income Fund, see "Distribution Contract" in the Tax-Exempt Income
Fund SAI.
Calculation of Performance Data
- -------------------------------
For additional information about the investment performance of Tax-
Exempt Income Fund, see "Calculation of Performance" in the Tax-Exempt Income
Fund SAI.
Financial Statements
- --------------------
Audited financial statements of Tax-Exempt Income Fund at December 31,
1995 are attached to the Tax-Exempt Income Fund SAI. The Fund's audited
financial statements at December 31, 1994 are incorporated by reference to the
filing: 1994 Annual Report to Shareholders, as filed with the Securities and
Exchange Commission on March 2, 1995 (accession number: 000095135-95-000336).
-6-
<PAGE> 108
JOHN HANCOCK TAX-FREE BOND FUND
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1995
This Statement of Additional Information provides information about John
Hancock Tax-Free Bond (the "Fund") in addition to the information that is
contained in the Fund's Class A and Class B Prospectus (the "Prospectus"),
dated May 1, 1995.
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Prospectus, a copy of which can be obtained
free of charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-5291
1-800-225-5291
TABLE OF CONTENTS
<TABLE>
<S> <C>
Organization of the Fund................................................... 2
Investment Objective and Policies.......................................... 2
Certain Investment Practices............................................... 5
Investment Restrictions.................................................... 10
Those Responsible for Management........................................... 12
Investment Advisory and Other Services..................................... 17
Distribution Contract...................................................... 19
Net Asset Value............................................................ 22
Initial Sales Charge On Class A Shares..................................... 22
Deferred Sales Charge on Class B Shares.................................... 23
Special Redemptions........................................................ 24
Additional Services and Programs........................................... 24
Description of the Fund's Shares........................................... 25
Tax Status................................................................. 27
Brokerage Allocation....................................................... 30
Transfer Agent Services.................................................... 31
Independent Auditors....................................................... 32
Custody of Portfolio....................................................... 32
Calculation of Performance................................................. 32
Appendix A................................................................. A-1
Financial Statements....................................................... F-1
</TABLE>
<PAGE> 109
ORGANIZATION OF THE FUND
The Fund is a diversified open-end management investment company organized
as a business trust under the laws of The Commonwealth of Massachusetts. Prior
to the approval of John Hancock Advisers, Inc. (the "Investment Adviser") as
the Fund's adviser, the Fund was known as Transamerica Tax-Exempt Bond Fund.
INVESTMENT OBJECTIVE AND POLICIES
INVESTMENT OBJECTIVE. As discussed under "Investment Objective and
Policies" in the Prospectus, the investment objective of the Fund is to obtain
as high a level of income exempt from federal income taxes as is consistent
with preservation of capital. The Fund seeks to achieve its objective by
investing primarily in municipal bonds which are rated at the time of purchase
within the four highest ratings and municipal notes which are rated at the time
of purchase within the two highest ratings assigned by Moody's Investors
Service, Inc. ("Moody's"), Standard & Poor's Ratings Group ("S&P") or Fitch
Investors Service, Inc. ("Fitch"); municipal bonds and notes which, if unrated,
are determined to be of comparable quality by John Hancock Advisers, Inc. (the
"Investment Adviser"); and municipal commercial paper rated within the two
highest quality ratings (collectively, "Municipal Obligations"). Securities in
which the Fund may invest may not earn as high a level of current income as
lower quality securities which have greater market risk and more fluctuation in
market value.
DESCRIPTION OF MUNICIPAL OBLIGATIONS. In seeking to achieve its
investment objective, the Fund invests in a variety of Municipal Obligations
which consist of Municipal Bonds, Municipal Notes and Municipal Commercial
Paper, the interest on which in the opinion of the bond issuer's counsel (not
the Fund's counsel) is exempt from federal income tax.
Municipal Bonds. Municipal bonds are issued to obtain funds for various
public purposes including the construction of a wide range of public facilities
such as airports, highways, bridges, schools, hospitals, housing, mass
transportation, streets and water and sewer works. Other public purposes for
which Municipal Bonds may be issued include refunding outstanding obligations,
obtaining funds for general operating expenses and obtaining funds to lend to
other public institutions and facilities. In addition, certain types of
industrial development bonds are issued by or on behalf of public authorities
to obtain funds for many types of local, privately operated facilities. Such
debt instruments are considered municipal obligations if the interest paid on
them is exempt from federal income tax. The payment of principal and interest
by issuers of certain obligations purchased by the Fund may be guaranteed by a
letter of credit, note repurchase agreement, insurance or other credit facility
agreement offered by a bank or other financial institution. Such guarantees
and the creditworthiness of guarantors will be considered by the Investment
Adviser in determining whether a Municipal Obligation meets the Fund's
investment quality requirements. No assurance can be given that a municipality
or guarantor will be able to satisfy the payment of principal or interest on a
municipal obligation.
Municipal Notes. Municipal Notes are short-term obligations of
municipalities, generally with a maturity ranging from six months to three
years. The principal types of such Notes include tax, bond and revenue
anticipation notes and project notes.
Municipal Commercial Paper. Municipal Commercial Paper is a short-term
obligation of a municipality, generally issued at a discount with a maturity of
less than one year. Such paper is
-2-
<PAGE> 110
likely to be issued to meet seasonal working capital needs of a municipality or
interim construction financing. Municipal Commercial Paper is backed in many
cases by letters of credit, lending agreements, note repurchase agreements or
other credit facility agreements offered by banks and other institutions.
Federal tax legislation enacted in the 1980's placed substantial new
restrictions on the issuance of the bonds described above and in some cases
eliminated the ability of state or local governments to issue Municipal
Obligations for some of the above purposes. Such restrictions do not affect
the Federal income tax treatment of Municipal Obligations in which the Fund may
invest which were issued prior to the effective dates of the provisions
imposing such restrictions. The effect of these restrictions may be to reduce
the volume of newly issued Municipal Obligations.
Issuers of Municipal Obligations are subject to the provisions of
bankruptcy, insolvency and other laws affecting the rights and remedies of
creditors, such as the Federal Bankruptcy Act, and laws, if any, which may be
enacted by Congress or state legislatures extending the time for payment of
principal or interest, or both, or imposing other constraints upon enforcement
of such obligations. There is also the possibility that as a result of
litigation or other conditions the power or ability of any one or more issuers
to pay when due the principal of and interest on their Municipal Obligations
may be affected.
The yields of Municipal Bonds depend upon, among other things, general
money market conditions, general conditions of the Municipal Bond market, size
of a particular offering, the maturity of the obligation and rating of the
issue. The ratings of S&P, Moody's and Fitch represent their respective
opinions of the quality of the Municipal Bonds they undertake to rate. It
should be emphasized, however, that ratings are general and not absolute
standards of quality. Consequently, Municipal Bonds with the same maturity,
coupon and rating may have different yields and Municipal Bonds of the same
maturity and coupon with different ratings may have the same yield. See
Appendix A for a description of ratings. Many issuers of securities choose not
to have their obligations rated. Although unrated securities eligible for
purchase by the Fund must be determined to be comparable in quality to
securities having certain specified ratings, the market for unrated securities
may not be as broad as for rated securities since many investors rely on rating
organizations for credit appraisal.
VARIABLE OR FLOATING RATE OBLIGATIONS. As discussed under "Investment
Objective and Policies" in the Prospectus, certain of the obligations in which
the Fund may invest may be variable or floating rate obligations on which the
interest rate is adjusted at predesignated periodic intervals (variable rate)
or when there is a change in the market rate of interest on which the interest
rate payable on the obligation is met is based (floating rate). Variable or
floating rate obligations may include a demand feature which entitles the
purchaser to demand prepayment of the principal amount prior to stated
maturity. Also, the issuer may have a corresponding right to prepay the
principal amount prior to maturity. As with any other type of debt security,
the marketability of variable or floating rate instruments may vary depending
upon a number of factors, including the type of issuer and the terms of the
instruments. The Fund may also invest in more recently developed floating rate
instruments which are created by dividing a municipal security's interest rate
into two or more different components. Typically, one component ("floating
rate component" or "FRC") pays an interest rate that is reset periodically
through an auction process or by reference to an interest rate index. A second
component ("inverse floating rate component" or "IFRC") pays an interest rate
that varies inversely with changes to market rates of interest, because the
interest paid to the IFRC holders is generally determined by subtracting a
variable or floating rate from a predetermined amount (i.e., the difference
between the total interest paid by the municipal security and that paid by the
FRC). The Fund may
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purchase FRC's without limitation. Up to 10% of the Fund's total assets may be
invested in IFRC's in an attempt to protect against a reduction in the income
earned on the Fund's other investments due to a decline in interest rates. The
extent of increases and decreases in the value of an IFRC generally will be
greater than comparable changes in the value of an equal principal amount of a
fixed-rate municipal security having similar credit quality, redemption
provisions and maturity. To the extent that such instruments are not readily
marketable, as determined by the Investment Adviser pursuant to guidelines
adopted by the Board of Trustees, they will be considered illiquid for purposes
of the Fund's 10% investment restriction on investment in non-readily
marketable securities.
PARTICIPATION INTERESTS. The Fund may purchase from financial
institutions tax exempt participation interests in tax exempt securities. A
participation interest gives the Fund an undivided interest in the tax exempt
security in the proportion that the Fund's participation interest bears to the
total amount of the tax exempt security. For certain participation interests,
the Fund will have the right to demand payment, on a specified number of days'
notice, for all or any part of the Fund's participation interest in the tax
exempt security plus accrued interest. Participation interests, which are
determined to be not readily marketable, will be considered as such for
purposes of the Fund's 10% investment restriction on investment in non-readily
marketable illiquid securities. The Fund may also invest in Certificates of
Participation (COP's) which provide participation interests in lease revenues.
Each Certificate represents a proportionate interest in or right to the
lease-purchase payment made under municipal lease obligations or installment
sales contracts. Typically, municipal lease obligations are issued by a state
or municipal financing authority to provide funds for the construction of
facilities (e.g., schools, dormitories, office buildings or prisons) or the
acquisition of equipment. The facilities are typically used by the state or
municipality pursuant to a lease with a financing authority. Certain municipal
lease obligations may trade infrequently. Participation interests in municipal
lease obligations will not be considered illiquid for purposes of the Fund's
10% limitation on illiquid securities provided the Investment Adviser
determines that there is a readily available market for such securities. In
reaching liquidity decisions, the Investment Adviser will consider, among
others, the following factors: (1) the frequency of trades and quotes for the
security; (2) the number of dealers wishing to purchase or sell the security
and the number of other potential purchasers; (3) dealer undertakings to make a
market in the security and (4) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the
method of soliciting offers and the mechanics of the transfer.) With respect
to municipal lease obligations, the Investment Adviser also considers: (1) the
willingness of the municipality to continue, annually or biannually, to
appropriate funds for payment of the lease; (2) the general credit quality of
the municipality and the essentiality to the municipality of the property
covered by the lease; (3) an analysis of factors similar to that performed by
nationally recognized statistical rating organizations in evaluating the credit
quality of a municipal lease obligation, including (i) whether the lease can be
cancelled; (ii) if applicable, what assurance there is that the assets
represented by the lease can be sold; (iii) the strength of the lessee's
general credit (e.g., its debt, administrative, economic and financial
characteristics); (iv) the likelihood that the municipality will discontinue
appropriating funding for the leased property because the property is no longer
deemed essential to the operations of the municipality (e.g., the potential for
an event of nonappropriation); and (v) the legal recourse in the event of
failure to appropriate; and (4) any other factors unique to municipal lease
obligations as determined by the Investment Adviser.
FUND CHARACTERISTICS AND OTHER POLICIES. The Fund may engage in
short-term trading consistent with its investment objective. Securities may be
sold in anticipation of a market decline (a rise in interest rates) or
purchased in anticipation of a market rise (a decline in interest rates). In
addition, a security may be sold and another security of comparable quality
purchased at approximately the same time to take advantage of what the
Investment Adviser believes to be a
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temporary disparity in the normal yield relationship between the two
securities. These yield disparities may occur for reasons not directly related
to the investment quality of particular issues or the general movement of
interest rates, such as changes in the overall demand for, or supply of,
various types of tax-exempt securities.
In general, purchases and sales may also be made to restructure the
portfolio in terms of average maturity, quality, coupon yield or
diversification for any one or more of the following purposes: (a) to increase
income, (b) to improve portfolio quality, (c) to minimize capital depreciation,
(d) to realize gains or losses, or (e) for such other reasons as the Investment
Adviser deems relevant in light of economic market conditions.
The Fund is a "diversified" management investment company under the
Investment Company Act of 1940 (the "Act"). This means that with respect to
75% of its total assets: (1) the Fund may not invest more than 5% of its total
assets in the securities of any one issuer other than U.S. government
securities and securities of other investment companies and (2) the Fund may
not own more than 10% of the outstanding voting securities of any one issuer.
In applying these limitations, a guarantee of a security will not be considered
a security of the guarantor, provided that the value of all securities issued
or guaranteed by that guarantor, and owned by the Fund, does not exceed 10% of
Fund's total assets. Since Municipal Obligations ordinarily purchased by the
Fund are not voting securities (notwithstanding the 75% limitation described
above), there is generally no limit on the percentage of a single issuer's
obligations which the Fund may own so long as it does not invest more than 5%
of its total assets in the securities of that issuer. Consequently, the Fund
may invest in a greater percentage of the outstanding securities of a single
issuer than would an investment company which invests in voting securities. In
determining the issuer of a security, each state and each political subdivision
agency, and instrumentality of each state and each multi-state agency of which
such state is a member is a separate issuer. Where securities are backed only
by assets and revenues of a particular instrumentality, facility or
subdivision, such entity is considered the issuer.
CERTAIN INVESTMENT PRACTICES
LENDING OF PORTFOLIO SECURITIES. In order to generate additional income,
the Fund may, from time to time, lend securities from its portfolios to
brokers, dealers and financial institutions such as banks and trust companies.
Such loans will be secured by collateral consisting of cash or U.S. Government
securities which will be maintained in an amount equal to at least 100% of the
current market value of the loaned securities. During the period of the loan,
the Fund will receive the income on both the loaned securities and the
collateral and thereby increase its return. Cash collateral will be invested
in short-term high quality debt securities, which will increase the current
income of the Fund. The loans will be terminable by the Fund at any time and
by the borrower on one day's notice. The Fund will have the right to regain
record ownership of loaned securities to exercise beneficial rights such as
rights to interest or other distributions or voting rights on important issues.
The Fund may pay reasonable fees to persons unaffiliated with the Fund for
services in arranging such loans. Lending of portfolio securities involves a
risk of failure by the borrower to return the loaned securities, in which event
the Fund may incur a loss.
WHEN-ISSUED AND FORWARD COMMITMENT SECURITIES. The Fund may purchase
securities on a when-issued or forward commitment basis. "When-issued" refers
to securities whose terms are available and for which a market exists, but
which have not been issued. The Fund will engage in when-issued transactions
with respect to securities purchased for its portfolio in order to obtain what
is considered to be an advantageous price and yield at the time of the
transaction. For when-issued transactions, no payment is made until delivery
is due, often a month or more after
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the purchase. In a forward commitment transaction, the Fund contracts to
purchase securities for a fixed price at a future date beyond customary
settlement time.
When the Fund engages in forward commitment and when-issued transactions,
it relies on the seller to consummate the transaction. The failure of the
issuer or seller to consummate the transaction may result in the Fund losing
the opportunity to obtain a price and yield considered to be advantageous. The
purchase of securities on a when-issued and forward commitment basis also
involves a risk of loss if the value of the security to be purchased declines
prior to the settlement date.
On the date the Fund enters into an agreement to purchase securities on a
when-issued or forward commitment basis, the Fund will segregate in a separate
account cash or liquid, high grade debt securities equal in value to the Fund's
commitment. These assets will be valued daily at market, and additional cash
or securities will be segregated in a separate account to the extent that the
total value of the assets in the account declines below the amount of the
when-issued commitments. Alternatively, the Fund may enter into offsetting
contracts for the forward sale of other securities that it owns.
REPURCHASE AGREEMENTS. The Fund may enter into repurchase agreements. A
repurchase agreement is a contract under which the Fund would acquire a
security for a relatively short period (generally not more than 7 days) subject
to the obligation of the seller to repurchase and the Fund to resell such
security at a fixed time and price (representing the Fund's cost plus
interest). The Fund will enter into repurchase agreements only with member
banks of the Federal Reserve System and with securities dealers. The
Investment Adviser will continuously monitor the creditworthiness of the
parties with whom the Fund enters into repurchase agreements. The Fund has
established a procedure providing that the securities serving as collateral for
each repurchase agreement must be delivered to the Fund's custodian either
physically or in book-entry form and that the collateral must be marked to
market daily to ensure that each repurchase agreement is fully collateralized
at all times. In the event of bankruptcy or other default by a seller of a
repurchase agreement, the Fund could experience delays in liquidating the
underlying securities and could experience losses, including the possible
decline in the value of the underlying securities during the period which the
Fund seeks to enforce its rights thereto, possible subnormal levels of income
and lack of access to income during this period, and the expense of enforcing
its rights.
The Fund is permitted to engage in certain hedging techniques involving
options and futures transactions in order to reduce the effect of interest rate
movements affecting the market values of the investments held, or intended to
be purchased, by the Fund.
OPTIONS ON DEBT SECURITIES. The Fund may purchase and write put and call
options on debt securities which are traded on a national securities exchange
(an "Exchange") to protect its holdings in municipal bonds against a
substantial decline in market value. Securities are considered related if
their price movements generally correlate to one another. The purchase of put
options on debt securities which are related to securities held in its
portfolio will enable the Fund to protect, at least partially, unrealized gains
in an appreciated security in its portfolio without actually selling the
security. In addition, the Fund may continue to receive tax-exempt interest
income on the security. However, under certain circumstances the Fund may not
be treated as the tax owner of a security held subject to a put option, in
which case interest with respect to such security would not be tax-exempt for
the Fund. The purchase of call options on debt securities may help to protect
against substantial increases in prices of securities the Fund intends to
purchase pending its ability to invest in such securities in an orderly manner.
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The Fund may sell put and call options it has previously purchased, which
could result in a net gain or loss depending on whether the amount realized on
the sale is more or less than the premium and other transaction costs paid in
connection with the option which is sold.
In order to protect partially against declines in the value of its
portfolio securities, the Fund may sell (write) call options on debt
securities. A call option gives the purchaser of such option in return for a
premium paid, the right to buy, and the seller has the obligation to sell, the
underlying security at the exercise price if the option is exercised during the
option period. The writer of the call option who receives the premium has the
obligation to sell the underlying security to the purchaser at the exercise
price during the option period if assigned an exercise notice. The Fund will
write call options only on a covered basis, which means that it will own the
underlying security subject to a call option at all times during the option
period. The exercise price of a call option may be below, equal to or above
the current market value of the underlying security at the time the option is
written.
During the option period, a covered call option writer may be assigned an
exercise notice by the broker/dealer through whom such call option was sold
requiring the writer to deliver the underlying security against payment of the
exercise price. This obligation is terminated upon the expiration of the
option period or at such earlier point in time when the writer effects a
closing purchase transaction.
Closing purchase transactions will ordinarily be effected to realize a
profit on an outstanding call option, to prevent an underlying security from
being called, in conjunction with the sale of the underlying security or to
enable the Fund to write another call option on the underlying security with a
different exercise price or different expiration date or both.
The Fund will write cash secured put options in order to facilitate its
ability to purchase a security at a price lower than the current market price
of such security. The Fund will write put options only on a "cash secured"
basis which means that if the Fund writes a "put" it will segregate cash
obligations in the event the "put" is exercised. "Puts" will only be written
in furtherance of the basic investment objectives of the Fund relating to the
acquisition of tax exempt securities and will not be written with the primary
intent of generating income from premiums paid to the Fund in connection with
the sale of the "put".
The purchase and writing of put and call options involves certain risks.
During the option period, the covered call writer has, in return for the
premium on the option, given up the opportunity to profit from a price increase
in the underlying securities above the exercise price, but, as long as its
obligation as a writer continues, has retained the risk of loss in the event
the price of the underlying security declines. A secured put writer assumes
the risk that the underlying security will fall below the exercise price in
which case the writer could be required to purchase the security at a higher
price than the then current market price of the security. In either instance,
the writer has no control over the time when it may be required to fulfill its
obligation as a writer of the option. Once an option writer has received an
exercise notice, it cannot effect a closing purchase transaction in order to
terminate its obligation under the option and must deliver the underlying
securities, in the case of a call, or acquire the contract securities, in the
case of a put, at the exercise price. If a put or call option purchased by the
Fund is not sold when it has remaining value, and if the market price of the
underlying security remains equal to or greater than the exercise price, in the
case of a put, or equal to or less than the exercise price, in the case of a
call, the Fund will lose its entire investment in the option. Also, where a
put or a call option on a particular security is purchased to hedge against
price movements in a related security, the price of the put or call option may
move more or less than the price of the related security.
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The Fund will not invest in a put or a call option if as a result the
amount of premiums paid for such options then outstanding, when added to the
premiums paid for financial and index futures and put and call options on such
futures, would exceed 10% of the Fund's total assets.
FUTURES CONTRACTS AND RELATED OPTIONS. The Fund may engage in the
purchase and sale of interest rate futures contracts ("financial futures") and
tax-exempt bond index futures contracts ("index futures") and the purchase and
writing of put and call options thereon, as well as put and call options on
tax-exempt bond indexes (if and when they are traded) only as a hedge against
changes in the general level of interest rates in accordance with strategies
more specifically described below.
The purchase of a financial futures contract obligates the buyer to accept
and pay for the specific type of debt security called for in the contract at a
specified future time and at a specified price. The Fund would purchase a
financial futures contract when it is not fully invested in long-term debt
securities but wishes to defer its purchases for a time until it can invest in
such securities in an orderly manner or because short-term yields are higher
than long-term yields. Such purchases would enable the Fund to earn the income
on a short-term security while at the same time minimizing the effect of all or
part of an increase in the market price of the long-term debt security which
the Fund intends to purchase in the future. A rise in the price of the
long-term debt security prior to its purchase either would generally be offset
by an increase in the value of the futures contract purchased by the Fund or
avoids by taking delivery of the debt securities under the futures contract.
The sale of a financial futures contract obligates the seller to deliver
the specific type of debt security called for in the contract at a specified
future time and at a specified price. The Fund would sell a financial futures
contract in order to continue to receive the income from a long-term debt
security, while endeavoring to avoid part or all of the decline in market value
of that security which would accompany an increase in interest rates. If
interest rates did rise, a decline in the value of the debt security held by
the Fund would be substantially offset by an increase in the value of the
futures contract sold by the Fund. While the Fund could sell a long-term debt
security and invest in a short-term security, ordinarily the Fund would give up
income on its investment, since long-term rates normally exceed short-term
rates.
In addition, the Fund may purchase and write put and call options on
financial futures contracts which are traded on an Exchange or a Board of Trade
and enter into closing transactions with respect to such options to terminate
an existing position. Options on financial futures contracts are similar to
options on securities except that a put option on a financial futures contract
gives the purchaser the right in return for the premium paid to assume a short
position in a financial futures contract and a call option on a financial
futures contract gives the purchaser the right in return for the premium paid
to assume a long position in a financial futures contract.
The Fund anticipates purchasing and selling tax-exempt bond index futures
as a hedge against changes in the market value of the tax exempt bonds which it
holds. A tax-exempt bond index fluctuates with changes in the market values of
the tax-exempt bonds included in the index. An index future has similar
characteristics to a financial future except that settlement is made through
delivery of cash rather than the underlying securities. The sale of an index
future obligates the seller to deliver at settlement an amount of cash equal to
a specified dollar amount multiplied by the difference between the value of the
index at the close of the last trading day of the contract and the price at
which the future was originally written.
The Fund may also purchase and write put and call options on tax-exempt
bond indexes (if and when such options are traded) and enter into closing
transactions with respect to such options.
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An option on an index future is similar to an option on a debt security except
that an option on an index future gives the holder the right to assume a
position in an index future. The Fund will use options on futures contracts
and options on tax-exempt bond indexes (if and when they are traded) in
connection with hedging strategies. Generally, these strategies would be
employed under the same market conditions in which the Fund would use put and
call options on debt securities.
The Fund may hedge up to the full value of its portfolio through the use
of options and futures. At the time the Fund purchases a futures contract, an
amount of cash or U.S. Government securities at least equal to the market value
of the futures contract will be deposited in a segregated account with the
Fund's Custodian to collateralize the position and thereby insure that such
futures contract is unleveraged. The Fund may not purchase or sell futures
contracts or purchase or write related put or call options if immediately
thereafter the sum of the amount of margin deposits on the Fund's existing
futures and related options positions and the amount of premiums paid for
related options (measured at the time of investment) would exceed 5% of the
Fund's total assets.
While the Fund's hedging transactions may protect the Fund against adverse
movements in the general level of interest rates, such transactions could also
preclude the opportunity to benefit from favorable movements in the level of
interest rates. Due to the imperfect correlation between movements in the
prices of futures contracts and movements in the prices of the related
securities being hedged, the price of a futures contract may move more than or
less than the price of the securities being hedged. There is an increased
likelihood that this will occur when a tax-exempt security is hedged by a
futures contract on a taxable security. Options on futures contracts are
generally subject to the same risks applicable to all option transactions. In
addition, the Fund's ability to use this technique will depend in part on the
development and maintenance of a liquid secondary market for such options. For
a discussion of the inherent risks involved with futures contracts and options
thereon, see "Risks Relating to Transactions in Futures Contracts and Related
Options" below.
The Fund's policies permitting the purchase and sale of futures contracts
and the purchase and writing of related put or call options for hedging
purposes only may not be changed without the approval of shareholders holding a
majority of the Fund's outstanding voting securities. The Board of Directors
may authorize procedures, including numerical limitations, with regard to such
transactions in furtherance of the Fund investment objectives. Such procedures
are not deemed to be fundamental and may be changed by the Board of Trustees
without the vote of the Fund's shareholders.
RISKS RELATING TO TRANSACTIONS IN FUTURES CONTRACTS AND RELATED OPTIONS.
Positions in futures contracts may be closed out only on an exchange or board
of trade which provides a market for such futures. Although the Fund intends
to purchase or sell futures contracts only on exchanges or boards of trade
where there appears to be an active market, there is no assurance that a liquid
market on an exchange or board of trade will exist for any particular contract
or at any particular time. In the event a liquid market does not exist, it may
not be possible to close a futures position, and in the event of adverse price
movements, the Fund would continue to be required to make daily cash payments
of maintenance margin. In addition, limitations imposed by an exchange or
board of trade on which futures contracts are traded may compel or prevent the
Fund from closing out a contract which may result in reduced gain or increased
loss to the Fund. The absence of a liquid market in futures contracts might
cause the Fund to make or take delivery of the underlying securities at a time
when it may be disadvantageous to do so. The purchase of put options on
futures contracts involves less potential dollar risk to the Fund than an
investment of equal amount in futures contracts, since the premium is the
maximum amount of risk the
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purchaser of the option assumes. The entire amount of the premium paid for an
option can be lost by the purchaser, but no more than that amount.
INVESTMENT RESTRICTIONS
The Fund has adopted certain fundamental investment restrictions upon its
investments as set forth below which may not be changed without the approval of
the holders of a majority of the outstanding shares of the Fund. A majority
for this purpose means: (a) more than 50% of the outstanding shares of the Fund
or (b) 67% or more of the shares represented at a meeting where more than 50%
of the outstanding shares of the Fund are represented, whichever is less.
Under these restrictions, the Fund may not:
1. Borrow money except from banks for temporary or emergency (not
leveraging) purposes, including the meeting of redemption requests
that might otherwise require the untimely disposition of securities,
in an amount up to 15% of the value of the Fund's total assets
(including the amount borrowed) valued at market less liabilities
(not including the amount borrowed) at the time the borrowings was
made. While borrowing exceed 5% of the value of the Fund's total
assets, the Fund will not purchase any additional securities.
Interest paid on borrowing will reduce the Fund's net investment
income.
2. Pledge, hypothecate, mortgage or otherwise encumber its assets,
except in an amount up to 10% of the value of its total assets but
only to secure borrowing for temporary or emergency purposes or as
may be necessary in connection with maintaining collateral in
connection with writing put and call options or making initial margin
deposits in connection with the purchase or sale of financial
futures, index futures contracts and related options.
3. With respect to 75% of its total assets, purchase securities (other
than obligations issued or guaranteed by the United States
government, its agencies of instrumentalities and shares of other
investment companies) of any issuer if the purchase would cause
immediately thereafter more than 5% of the value of the Fund's total
assets invested in the securities of such issuer or the Fund would
own more than 10% of the outstanding voting securities of such
issuer.
4. Make loans to others, except through the purchase of obligations in
which the Fund is authorized to invest, entering in repurchase
agreements and lending portfolio securities in an amount not
exceeding one third of its total assets.
5. Purchase illiquid securities, including securities subject to
restrictions on disposition under the Securities Act of 1933,
repurchase agreements maturing in more than seven days, and
securities which do not have readily available market quotations, if
such purchase would cause the Fund to have more than 10% of its net
assets invested in such types of securities.
6. Purchase or retain the securities of any issuer, if those officers
and Trustees of the Fund or the Investment Adviser who own
beneficially more than of 1% of the securities of such issuer,
together own more than 5% of the securities of such issuer.
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7. Write, purchase or sell puts, calls or combinations thereof, except
put and call options on debt securities, futures contracts based on
debt securities, indices of debt securities and futures contracts
based on indices of debt securities, sell securities on margin or
make short sales of securities or maintain a short position, unless
at all times when a short position is open it owns an equal amount of
such securities or securities convertible into or exchangeable,
without payment of any further consideration, for securities of the
same issue as, and equal in amount to, the securities sold short, and
unless not more than 10% of the Fund's net assets (taken at current
value) is held as collateral for such sales at any one time.
8. Underwrite the securities of other issuers, except insofar as the
Fund may be deemed an underwriter under the Securities Act of 1933 in
disposing of a portfolio security.
9. Purchase or sell real estate, real estate investment trust
securities, commodities or commodity contracts, except commodities
and commodities contracts which are necessary to enable the Fund to
engage in permitted futures and options transactions necessary to
implement hedging strategies, or oil and gas interests. This
limitation shall not prevent the Fund from investing in municipal
securities secured by real estate or interests in real estate or
holding real estate acquired as a result of owning such municipal
securities.
10. Invest in common stock or in securities of other investment
companies, except that securities of investment companies may be
acquired as part of a merger, consolidation or acquisition of assets
and units of registered unit investment trusts whose assets consist
substantially of tax-exempt securities may be acquired to the extent
permitted by Section 12 of the Act or applicable rules.
11. Invest more than 25% of its assets in the securities of "issuers" in
any single industry; provided that there shall be no limitation on
the purchase of obligations issued or guaranteed by the United States
Government, its agencies or instrumentalities or by any state or
political subdivision thereof. For purposes of this limitation when
the assets and revenues of an agency, authority, instrumentality or
other political subdivision are separate from those of the government
creating the issuing entity and a security is backed only by the
assets and revenues of the entity, the entity would be deemed to be
the sole issuer of the security. Similarly, in the case of an
industrial development or pollution control bond, if that bond is
backed only by the assets and revenues of the nongovernmental user,
then such nongovernmental user would be deemed to be the sole issuer.
If, however, in either case, the creating government or some other
entity guarantees a security, such a guarantee would be considered a
separate security and would be treated as an issue of such government
or other entity unless all securities issued or guaranteed by the
government or other entity owned by the Fund does not exceed 10% of
the Fund's total assets.
12. Invest more than 5% of its total assets in securities of any issuers
if the party responsible for payment, together with any predecessor,
has been in operation for less than three years (except U.S.
government and agency obligations and obligations backed by the
faith, credit and taxing power of any person authorized to issue tax
exempt securities).
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13. Issue any senior securities, except insofar as the Fund may be deemed
to have issued a senior security by: entering into a repurchase
agreement; purchasing securities in a when-issued or delayed delivery
basis; purchasing or selling any options or financial futures
contract; borrowing money or lending securities in accordance with
applicable investment restrictions.
In order to comply with certain state regulatory policies, the Fund has
adopted a non- fundamental policy prohibiting the purchase of warrants. The
Fund's Board of Trustees has approved the following non-fundamental investment
policy pursuant to an order of the SEC: Notwithstanding any investment
restriction to the contrary, the Fund may, in connection with the John Hancock
Group of Funds Deferred Compensation Plan for Independent Trustees/Directors,
purchase securities of other investment companies within the John Hancock Group
of Funds provided that, as a result, (i) no more than 10% of the Fund's assets
would be invested in securities of all other investment companies, (ii) such
purchase would not result in more than 3% of the total outstanding voting
securities of any one such investment company being held by the Fund and (iii)
no more than 5% of the Fund's assets would be invested in any one such
investment company.
THOSE RESPONSIBLE FOR MANAGEMENT
The business of the Fund is managed by its Trustees who elect officers who
are responsible for the day-to-day operations of the Fund and who execute
policies formulated by the Trustees. Several of the officers and Trustees of
the Fund are also officers and directors of the Investment Adviser or officers
and directors of the Fund's distributor John Hancock Funds, Inc. ("John
Hancock Funds" or the "Distributor").
Set forth below is information with respect to each of the Fund's officers
and Trustees. The officers and Trustees may be contacted at 101 Huntington
Avenue, Boston, MA 02199-7603. Their affiliations represent their principal
occupations during the past five years.
EDWARD J. BOUDREAU, JR.,* Trustee, Chairman and Chief Executive Officer.
Chairman and Chief Executive Officer, the Investment Adviser and The
Berkeley Financial Group ("The Berkeley Group"); Chairman, NM Capital
Management, Inc. ("NM Capital"); John Hancock Advisers International
Limited ("Advisers International"); John Hancock Funds, Inc; John Hancock
Investor Services Corporation ("Investor Services"); and Sovereign Asset
Management Corporation ("SAMCorp"); (hereinafter the Investment Adviser,
the Berkeley Group, NM Capital, Advisers International, John Hancock
Funds, Inc., Investor Services and SAMCorp are collectively referred to as
the "Affiliated Companies"); Chairman, First Signature Bank & Trust;
Director, John Hancock Freedom Securities Corporation, John Hancock
Capital Corporation, New England/Canada Business Council; Member,
Investment Company Institute Board of Governors; Trustee, Museum of
Science; President, the Investment Adviser (until July 1992); Trustee or
Director of other investment companies managed by the Investment Adviser;
and Chairman, John Hancock Distributors, Inc. (until April, 1994).
JAMES F. CARLIN, Trustee. Chairman and CEO, Carlin Consolidated, Inc.
(insurance); Director, Arbella Mutual Insurance Company (insurance),
Consolidated Group Trust (group health plan), Carlin Insurance Agency,
Inc. and West Insurance Agency, Inc.;
* An "interested person" of the Fund, as such a term is defined in the Act.
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Receiver, the City of Chelsea (until August 1992); and Trustee or Director
of other investment companies managed by the Investment Adviser.
WILLIAM H. CUNNINGHAM, Trustee. Chancellor, University of Texas System and
former President of the University of Texas, Austin, Texas; Regents Chair
in Higher Education Leadership; James L. Bayless Chair for Free
Enterprise; Professor of Marketing and Dean College of Business
Administration/Graduate School of Business (1983-1985); Centennial Chair
in Business Education Leadership, 1983-1985; Director, LaQuinta Motor
Inns, Inc. (hotel management company); Director, Jefferson-Pilot
Corporation (diversified life insurance company); Director,
Freeport-McMoran Inc. (oil and gas company); Director, Barton Creek
Properties, Inc. (1988-1990) (real estate development) and LBJ Foundation
Board (education foundation); Advisory Director, Texas Commerce Bank -
Austin; and Trustee or Director of other investment companies managed by
the Investment Adviser.
CHARLES L. LADNER, Trustee. Director, Energy North, Inc. (public utility
holding company); Senior Vice President, Finance Corp (public utility
holding company) (until 1992); and Trustee or Director of other
investment companies managed by the Investment Adviser.
LEO E. LINBECK, JR., Trustee. Chairman, President, Chief Executive Officer and
Director, Linbeck Corporation (a holding company engaged in various phases
of the construction industry and warehousing interests); Director and
Chairman, Federal Reserve Bank of Dallas; Chairman of the Board and Chief
Executive Officer, Linbeck Construction Corporation; Director, Panhandle
Eastern Corporation (a diversified energy company); Director, Daniel
Industries, Inc. (manufacturer of gas measuring products and energy
related equipment); Director, GeoQuest International, Inc. (a geophysical
consulting firm); Director, Greater Houston Partnership; and Trustee or
Director of other investment companies managed by the Investment Adviser.
PATRICIA P. MCCARTER, Trustee. Director and Secretary, the McCarter Corp.
(machine manufacturer); and Trustee or Director of other investment
companies managed by the Investment Adviser.
STEVEN R. PRUCHANSKY, Trustee. Director and Treasurer, Mast Holdings, Inc.;
Director, First Signature Bank & Trust Company (until August 1991);
General Partner, Mast Realty Trust; President, Maxwell Building Corp.
(until 1991); and Trustee or Director of other investment companies
managed by the Investment Adviser.
NORMAN H. SMITH, Trustee. Lieutenant General, USMC, Deputy Chief of Staff for
Manpower and Reserve Affairs, Headquarters Marine Corps; Commanding
General III Marine Expeditionary Force/3rd Marine Division (retired 1991);
and Trustee or Director of other investment companies managed by the
Investment Adviser.
JOHN P. TOOLAN, Trustee. Director, The Smith Barney Muni Bond Funds, The Smith
Barney Tax-Free Money Fund, Inc., Vantage Money Market Funds (mutual
funds), The Inefficient-Market Fund, Inc. (closed-end investment company)
and Smith Barney Trust Company of Florida; Chairman, Smith Barney Trust
Company (retired December, 1991); Director, Smith Barney, Inc., Mutual
Management Company and Smith, Barney Advisers, Inc. (investment advisers)
(retired 1991); and Senior Executive Vice President, Director and member
of the Executive Committee, Smith Barney, Harris Upham & Co, Incorporated
(investment bankers) (until 1991); and Trustee or Director of other
investment companies managed by the Investment Adviser.
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<PAGE> 121
ROBERT G. FREEDMAN*, Vice Chairman and Chief Investment Officer. President and
Chief Investment Officer, the Investment Adviser.
ANNE C. HODSDON*, President. President and Chief Operations Officer, the
Investment Adviser; Executive Vice President, the Investment Adviser
(until December, 1994).
JAMES B. LITTLE*, Senior Vice President and Chief Financial Officer. Senior
Vice President, the Investment Adviser.
THOMAS H. DROHAN*, Senior Vice President and Secretary. Senior Vice President
and Secretary, the Investment Adviser.
MICHAEL P. DICARLO*, Senior Vice President. Senior Vice President, the
Investment Adviser.
EDGAR LARSEN*, Senior Vice President. Senior Vice President, the Investment
Adviser.
B.J. WILLINGHAM*, Senior Vice President. Senior Vice President, the Investment
Adviser. Formerly, Director and Chief Investment Officer of Transamerica
Fund Management Company.
JAMES J. STOKOWSKI*, Vice President and Treasurer. Vice President, the
Investment Adviser.
SUSAN S. NEWTON*, Vice President and Compliance Officer. Vice President and
Assistant Secretary, the Investment Adviser.
JOHN A. MORIN*, Vice President. Vice President, the Investment Adviser.
THOMAS J. PRESS*, Vice President and Assistant Secretary. Vice President and
Assistant Secretary, the Investment Adviser. Formerly, General Counsel
and Secretary, Transamerica Management Company; Secretary and Treasurer,
Transamerica Asset Management Group, Inc.; and Secretary, Transamerica
Funds Distributors, Inc.
All of the officers listed are officers or employees of the Investment
Adviser or affiliated companies. Some of the Trustees and officers may also be
officers and/or directors and/or trustees of one or more of the other funds for
which the Investment Adviser serves as investment adviser.
As of January 31, 1995, there were 19,454,101 shares of the Fund
outstanding and officers and trustees of the Fund as a group beneficially owned
less than 1% of these outstanding shares. At such date, no person owned of
record or was known by the Fund to own beneficially as much as 5% of the
outstanding shares of the Fund.
As of December 22, 1994, the Trustees have established an Advisory Board
which acts to facilitate a smooth transition of management over a two-year
period (between Transamerica Fund Management Company ("TFMC"), the prior
investment adviser, and the Investment Adviser). The members of the Advisory
Board are distinct from the Board of Trustees, do not serve the Fund in any
other capacity and are persons who have no power to determine what securities
are
* An "interested person" of the Fund, as such term is defined in the Act.
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purchased or sold and behalf of the Fund. Each member of the Advisory Board
may be contacted at 101 Huntington Avenue, Boston, Massachusetts 02199.
Members of the Advisory Board and their respective principal occupations
during the past five years are as follows:
R. Trent Campbell, President, FMS, Inc. (financial and management services);
former Chairman of the Board, Mosher Steel Company.
Mrs. Lloyd Bentsen, Formerly National Democratic Committeewoman from Texas;
co-founder, Houston Parents' League; former board member of various civic
and cultural organizations in Houston, including the Houston Symphony,
Museum of Fine Arts and YWCA. Mrs. Bentsen is presently active in various
civic and cultural activities in the Washington, D.C. area, including
membership on the Area Board for The March of Dimes and is a National
Trustee for the Botanic Gardens of Washington, D. C.
Thomas R. Powers, Formerly Chairman of the Board, President and Chief Executive
Officer, TFMC; Director, West Central Advisory Board, Texas Commerce Bank;
Trustee, Memorial Hospital System; Chairman of the Board of Regents of
Baylor University; Member, Board of Governors, National Association of
Securities Dealers, Inc.; Formerly, Chairman, Investment Company
Institute; formerly, President, Houston Chapter of Financial Executive
Institute.
Thomas B. McDade, Chairman and Director, TransTexas Gas Company; Director,
Houston Industries and Houston Lighting and Power Company; Director,
TransAmerican Companies (natural gas producer and transportation); Member,
Board of Managers, Harris County Hospital District; Advisory Director,
Commercial State Bank, El Campo; Advisory Director, First National Bank of
Bryan; Advisory Director, Sterling Bancshares; Former Director and Vice
Chairman, Texas Commerce Bancshares; and Vice Chairman, Texas Commerce
Bank.
COMPENSATION OF THE BOARD OF TRUSTEES AND ADVISORY BOARD. The following
table provides information regarding the compensation paid by the Fund and the
other investment companies in the John Hancock Fund Complex to the Independent
Trustees and the Advisory Board members for their services. Mr. Boudreau, a
non-Independent Trustee, and each of the officers of the Funds are interested
persons of the Investment Adviser, are compensated by the Investment Adviser
and received no compensation from the Funds for their services.
[/R]
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<TABLE>
<CAPTION>
Pension or Total Compensation
Retirement from all Funds in
Aggregate Benefits Accrued John Hancock
Compensation as Part of the Fund Complex to
Trustees from the Fund Fund's Expenses Trustees**
- -------- ------------- ---------------- ------------------
<S> <C> <C> <C>
James F. Carlin $ 0 $0 $ 60,452
William H. Cunningham $ 4,495 * $0 $ 0
Charles L. Ladner $ 0 $0 $ 60,450
Leo E. Linbeck, Jr. $ 4,495 * $0 $ 0
Patricia P. McCarter $ 0 $0 $ 60,200
Steven R. Pruchansky $ 0 $0 $ 62,450
Norman H. Smith $ 0 $0 $ 62,450
John P. Toolan $ 0 $0 $ 62,450
Total $ 8,990 $0 $ 366,450
</TABLE>
* Compensation made pursuant to different compensation arrangements then in
effect.
** The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31, 1994.
All Trustees/Directors except Messrs. Cunnignham and Linbeck are
Trustees/Direcotrs of 39 funds in the John Hancock Fund Complex. Messrs.
Cunningham and Linbeck are Trustees/Directors of 21 funds. (The Fund was
not part of the John Hancock Fund Complex until December 22, 1994 and
Messrs. Cunningham and Linbeck were not trustees or directors of any funds
in the John Hancock Fund Complex prior to December 22, 1994.)
<TABLE>
<CAPTION>
Pension or Total Compensation
Retirement from all Funds in
Aggregate Benefits Accrued John Hancock
Compensation as Part of the Fund Complex to
Advisory Board*** from the Fund Fund's Expenses Trustees***
- ----------------- ------------- ---------------- ------------------
<S> <C> <C> <C>
R. Trent Campbell $ 54,000 $0 $ 54,000
Mrs. Lloyd Bentsen $ 54,000 $0 $ 54,000
Thomas R. Powers $ 54,000 $0 $ 54,000
Thomas B. McDade $ 54,000 $0 $ 54,000
TOTAL $ 216,000 $0 $ 216,000
</TABLE>
*** Estimated for the Fund's current fiscal year ending December 31, 1995.
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<PAGE> 124
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectus, the Fund receives its investment advice
from the Investment Adviser. Investors should refer to the Prospectus for a
description of certain information concerning the investment management
contract. Each of the Trustees and principal officers of the Fund who is also
an affiliated person of the Investment Adviser is named above, together with the
capacity in which such person is affiliated with the Fund and the Investment
Adviser.
The Investment Adviser, located at 101 Huntington Avenue, Boston,
Massachusetts 02199-7603, was organized in 1968 and has more than $13 billion in
assets under management in its capacity as investment adviser to the Fund and
the other mutual funds and publicly traded investment companies in the John
Hancock group of funds having a combined total of over 1,060,000 shareholders.
The Investment Adviser is a wholly-owned subsidiary of The Berkeley Financial
Group, which is in turn a wholly-owned subsidiary of John Hancock Subsidiaries,
Inc., which is in turn a wholly-owned subsidiary of John Hancock Mutual Life
Insurance Company (the "Life Company"), one of the nation's oldest and largest
financial services companies. With total assets under management of over $80
billion, the Life Company is one of the ten largest life insurance companies in
the United States, and carries Standard & Poor's and A.M. Best's highest
ratings. Founded in 1862, the Life Company has been serving clients for over
130 years.
As described in the Prospectus under the caption, "Organization and
Management of the Fund," the Fund has entered into an investment management
contract with the Investment Adviser. Under the investment management contract,
the Investment Adviser provides the Fund with (i) a continuous investment
program, consistent with the Fund's stated investment objective and policies,
(ii) supervision of all aspects of the Fund's operations except those that are
delegated to a custodian, transfer agent or other agent and (iii) such
executive, administrative and clerical personnel, officers and equipment as are
necessary for the conduct of its business. The Investment Advisor is
responsible for the management of the Fund's portfolio assets.
No person other than the Investment Adviser, its directors and employees
regularly furnishes advice to the Fund with respect to the desirability of the
Fund investing in, purchasing or selling securities. The Investment Adviser may
from time to time receive statistical or other similar factual information, and
information regarding general economic factors and trends, from the Life Company
and its affiliates.
Under the terms of the investment management contract with the Fund, the
Investment Adviser provides the Fund with office space, equipment and supplies
and other facilities and personnel required for the business of the Fund. The
Investment Adviser pays the compensation of all officers and employees of the
Fund and Trustees of the Fund affiliated with the Investment Adviser, the office
expenses of the Fund, including those of the Fund's Treasurer and Secretary, and
other expenses incurred by the Investment Adviser in connection with the
performance of its duties. All expenses which are not specifically paid by the
Investment Adviser and which are incurred in the operation of the Fund
including, but not limited to, (i) the fees of the Trustees of the Fund who are
not "interested persons," as such term is defined in the 1940 Act (the
"Independent Trustees"), (ii) the fees of the members of the Fund's Advisory
Board (described above) and (iii) the continuous public offering of the shares
of the Fund are borne by the Fund.
As provided by the investment management contract, the Fund pays the
Investment Adviser an investment management fee, which is accrued daily and paid
monthly in arrears, equal on an annual basis to a 0.55% of the Fund's average
daily net asset value.
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<PAGE> 125
The Investment Adviser may voluntarily and temporarily reduce its advisory
fee or make other arrangements to limit the Fund's expenses to a specified
percentage of average daily net assets. The Investment Adviser retains the
right to re-impose the advisory fee and recover any other payments to the extent
that, at the end of any fiscal year, the Fund's annual expenses fall below this
limit.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of any state limit where the
Fund is registered to sell shares of beneficial interest, the fee payable to the
Investment Adviser will be reduced to the extent required by law. At this time,
the most restrictive limit on expenses imposed by a state requires that expenses
charged to the Fund in any fiscal year not exceed 2.5% of the first $30,000,000
of the Fund's average daily net asset value, 2% of the next $70,000,000 and 1.5%
of the remaining average daily net asset value. When calculating the limit
above, the Fund may exclude interest, brokerage commissions and extraordinary
expenses.
Pursuant to the investment management contract, the Investment Adviser is
not liable to the Fund or its shareholders for any error of judgment or mistake
of law or for any loss suffered by the Fund in connection with the matters to
which its contract relates, except a loss resulting from willful misfeasance,
bad faith or gross negligence on the part of the Investment Adviser in the
performance of its duties or from its reckless disregard of the obligations and
duties under the contract.
The investment management contract initially expires on December
22, 1996, and will continue in effect from year to year thereafter if
approved annually by a vote of a majority of the Trustees of the Fund
who are not interested persons of one or more of the parties to the
contract, cast in person at a meeting called for the purpose of voting
on such approval, and by either a majority of the Trustees or the
holders of a majority of the Fund's outstanding voting securities.
The management contract may, on 60 days' written notice, be terminated
at any time without the payment of any penalty by the Fund by vote of
a majority of the outstanding voting securities of the Fund, by the
Trustees or by the Investment Adviser. The management contract
terminates automatically in the event of its assignment.
Securities held by the Fund may also be held by other funds or
investment advisory clients for which the Investment Adviser or its
affiliates provide investment advice. Because of different investment
objectives or other factors, a particular security may be bought for
one or more funds or clients when one or more are selling the same
security. If opportunities for purchase or sale of securities by the
Investment Adviser or for other funds or clients for which the
Investment Adviser renders investment advice arise for consideration
at or about the same time, transactions in such securities will be
made, insofar as feasible, for the respective funds or clients in a
manner deemed equitable to all of them. To the extent that
transactions on behalf of more than one client of the Investment
Adviser or its respective affiliates may increase the demand for
securities being purchased or the supply of securities being sold,
there may be an adverse effect on price.
Under the investment management contract, the Fund may use the
name "John Hancock" or any name derived from or similar to it only for
so long as the investment management contract or any extension,
renewal or amendment thereof remains in effect. If the Fund's
investment management contract is no longer in effect, the Fund (to
the extent that it lawfully can) will cease to use such name or any
other name indicating that it is advised by or otherwise connected
with the Investment Adviser. In addition, the Investment Adviser or
the Life Company may grant the non-exclusive right to use the name
"John Hancock" or any similar name to any other corporation or entity,
including but not limited to any investment company of which the Life
Company or any
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<PAGE> 126
subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
For the fiscal years ended December 31, 1992, 1993 and 1994 advisory fees
payable by the Fund to TFMC, the Fund's former investment adviser, amounted to
$515,297, $888,791 and $1,136,532, respectively; however, a portion of such fees
were not imposed pursuant to the voluntary fee and expense assumption and fee
waiver then in effect (see "The Fund's Expenses" in the Prospectus). For the
period from December 22, 1994 to December 31, 1994, advisory fees payable by the
Fund were paid to the Investment Adviser.
ADMINISTRATIVE SERVICES AGREEMENT. The Fund was a party to an administrative
services agreement with TFMC (the "Services Agreement"), pursuant to which TFMC
performed bookkeeping and accounting services and functions, including preparing
and maintaining various accounting books, records and other documents and
keeping such general ledgers and portfolio accounts as are reasonably necessary
for the operation of the Fund. Other administrative services included
communications in response to shareholder inquiries and certain printing
expenses of various financial reports. In addition, such staff and office space,
facilities and equipment was provided as necessary to provide administrative
services to the Fund. The Services Agreement was amended in connection with the
appointment of the Investment Adviser as adviser to the Fund to permit services
under the Agreement to be provided to the Fund by the Investment Adviser and its
affiliates. The Services Agreement was terminated during the current fiscal
year.
For the fiscal years ended December 31, 1992, 1993 and 1994, the Fund paid
to TFMC (pursuant to the Services Agreement) $68,225, $94,272 and $116,742,
respectively, of which $43,681, $62,855 and $81,515, respectively, was paid to
TFMC and $24,544, $31,417 and $35,227, respectively, were paid for certain data
processing and pricing information services.
DISTRIBUTION CONTRACT
As discussed in the Prospectus, the Fund's shares are sold on a continuous
basis at the public offering price. The Distributor, a wholly-owned subsidiary
of the Investment Adviser, has the exclusive right, pursuant to the Distribution
Agreement dated December 22, 1994 (the "Distribution Agreement"), to purchase
shares from the Fund at net asset value for resale to the public or to
broker-dealers at the public offering price. Upon notice to all broker-dealers
("Selling Brokers") with whom it has sales agreements, the Distributor may allow
such Selling Brokers up to the full applicable sales charge during periods
specified in such notice. During these periods, such Selling Brokers may be
deemed to be underwriters as that term is defined in the Securities Act of 1933.
The Distribution Agreement was initially adopted by the affirmative vote of
the Fund's Board of Trustees including the vote a majority of Trustees who are
not parties to the agreement or interested persons of any such party, cast in
person at a meeting called for such purpose. The Distribution Agreement shall
continue in effect until December 22, 1994 and from year to year if approved by
either the vote of the Fund's shareholders or the Board of Trustees including
the vote of a majority of Trustees who are not parties to the agreement or
interest persons of any such
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<PAGE> 127
party, cast in person at a meeting called for such purpose. The Distribution
Agreement may be terminated at any time, without penalty, by either party upon
sixty (60) days' written notice or by a vote of a majority of the outstanding
voting securities of the Fund and terminates automatically in the case of an
assignment by the Distributor.
Total underwriting commissions for sales of the Fund's Class A Shares for
the fiscal years ended December 31, 1992, 1993 and 1994, respectively, were
$1,430,272, $1,224,810 and $149,847, respectively. Of such amounts $121,373,
$108,653 and $47,967, respectively, were retained by the Fund's former
distributor, Transamerica Fund Distributors, Inc. and the remainder was
reallowed to dealers. For the period from December 22, 1994 to December 31,
1994, underwriting commissions were paid to the Distributor.
DISTRIBUTION PLAN. The Board of Trustees, including the Independent Trustees
of the Fund, approved new distribution plans pursuant to Rule 12b-1 under the
1940 Act for Class A Shares ("Class A Plan") and Class B Shares ("Class B
Plan"). Such Plans were approved by a majority of the outstanding shares of each
respective class on December 16, 1994 and became effective on December 22, 1994.
Under the Class A Plan, the distribution or services fee will not exceed an
annual rate of 0.15% of the average daily net asset value of the Class A Shares
of the Fund (determined in accordance with such Fund's Prospectus as from time
to time in effect). Any expenses under the Class A Plan not reimbursed within 12
months of being presented to the Fund for repayment are forfeited and not
carried over to future years. Under the Class B Plan, the distribution or
services fee to be paid by the Fund will not exceed an annual rate of 1.00% of
the average daily net assets of the Class B Shares of the Fund (determined in
accordance with such Fund's prospectus as from time to time in effect); provided
that the portion of such fee used to cover Service Expenses (described below)
shall not exceed an annual rate of 0.25% of the average daily net asset value of
the Class B Shares of the Fund. The Distributor has agreed to limit the payment
of expenses pursuant to the Class B Plan to 0.90% of the average daily net
assets of the Class B Shares of the Fund. Under the Class B Plan, the fee covers
the Distribution and Service Expenses (described below) and interest expenses on
unreimbursed distribution expenses. In accordance with generally accepted
accounting principles, the Fund does not treat distribution fees in excess of
0.75% of the Fund's net assets attributable to Class B shares as a liability of
the Fund and does not reduce the current net assets of Class B by such amount
although the amount may be payable in the future.
Under the Plans, expenditures shall be calculated and accrued daily and paid
monthly or at such other intervals as the Trustees shall determine. The fee may
be spent by the Distributor on Distribution Expenses or Service Expenses.
"Distribution Expenses" include any activities or expenses primarily intended to
result in the sale of shares of the relevant class of the Fund, including, but
not limited to: (i) initial and ongoing sales compensation payable out of such
fee as such compensation is received by the Distributor or by Selling Brokers,
(ii) direct out-of-pocket expenses incurred in connection with the distribution
of shares, including expenses related to printing of prospectuses and reports;
(iii) preparation, printing and distribution of sales literature and advertising
material; (iv) an allocation of overhead and other branch office expenses of the
Distributor related to the distribution of Fund Shares (v) distribution expenses
that were incurred by the Fund's former distributor and not recovered through
payments under the Class A or Class B former plans or through receipt of
contingent deferred sales charges; and (vi) in the event that any other
investment company (the "Acquired Fund") sells all or substantially all of its
assets, merges or otherwise engages in a combination with the Fund, distribution
expenses originally incurred in connection with the distribution of the Acquired
Fund's shares. Service Expenses under the Plans include payments made to, or on
account of, account executives of selected
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<PAGE> 128
broker-dealers (including affiliates of the Distributor) and others who furnish
personal and shareholder account maintenance services to shareholders of the
relevant class of the Fund.
During the fiscal year ended December 31, 1994, total payments made by the
Fund under the former Class A Rule 12b-1 plan to the former distributor amounted
to $200,118, and of such amount $417, $2,068, $555, $26,800 and $170,278
represented payments for (1) the cost of printing and distribution prospectuses
and financial reports to investors, (2) various sales literature, (3)
advertising expenses, (4) distribution and/or administrative services and (5)
service fees, respectively. During the period from December 22, 1994 to December
31, 1994, payment under the Class A Plan was made to the Distributor.
During the fiscal year ended December 31, 1994, total payments made by the
Fund under the former Class B Rule 12b-1 plan to the former distributor amounted
to $658,933 of which:
** (1) $109,829 represented service fees which were comprised of
$29,408 for distribution and/or administrative services
provided by the Fund's former distributor and $80,421 for
service fees paid to broker/dealers.
(2) $549,104 represented as the total of distribution fees paid
to the former distributor which are comprised of:
a) $232,594 for dealer commission payments;
b) $58,148 for underwriting fees; and
c) $258,362 for interest or the carrying charges.
For the fiscal year ended December 31, 1994, the former distributor received
$209,200 in contingent deferred sales charges from redemption of the Fund's
Class B shares. For the period from December 22, 1994 to December 31, 1994, the
Distributor received fees under the Class B Plan and contingent deferred sales
charges from redemptions of Class B shares.
Each of the Plans provides that it will continue in effect only so long as
its continuance is approved at least annually by a majority of both the Trustees
and the Independent Trustees. Each of the Plans provides that it may be
terminated (a) at any time by vote of a majority of the Trustees, a majority of
the Independent Trustees, or a majority of the respective Class' outstanding
voting securities or (b) by the Distributor on 60 days' notice in writing to the
Fund. Each of the Plans further provides that it may not be amended to increase
the maximum amount of the fees for the services described therein without the
approval of a majority of the outstanding shares of the class of the Fund which
has voting rights with respect to the Plan. Each of the Plans provides that no
material amendment to the Plan will, in any event, be effective unless it is
approved by a majority vote of the Trustees and the Independent Trustees of the
Fund. The holders of Class A Shares and Class B Shares have exclusive voting
rights with respect to the Plan applicable to their respective class of shares.
The Board of Trustees, including the Trustees who are not interested in the Fund
and have no direct or indirect interest in the Plans, has determined that, in
their judgment, there is a reasonable likelihood that the Plans will benefit the
holders of the applicable class of shares of the Fund.
Information regarding the services rendered under the Plans and the
Distribution Agreement and the amounts paid therefore by the respective Class of
the Fund are provided to, and reviewed by, the Board of Trustees on a quarterly
basis. In its quarterly review, the Board of Trustees considers the continued
appropriateness of the Plans and the Distribution Agreement and the level of
compensation provided therein.
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<PAGE> 129
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of a Fund's shares,
the following procedures are utilized wherever applicable. Debt investment
securities are valued on the basis of valuations furnished by a principal market
maker or a pricing service, both of which generally utilize electronic data
processing techniques to determine valuations for normal institutional size
trading units of debt securities without exclusive reliance upon quoted prices.
Short-term debt investments which have a remaining maturity of 60 days or
less are generally valued at amortized cost which approximates market value. If
market quotations are not readily available or if in the opinion of the
Investment Adviser any quotation or price is not representative of true market
value, the fair value of the security may be determined in good faith in
accordance with procedures approved by the Trustees. The Fund will not price its
securities on the following national holidays: New Year's Day; President's Day;
Good Friday; Memorial Day; Independence Day; Labor Day; Thanksgiving Day; and
Christmas Day.
INITIAL SALES CHARGE ON CLASS A SHARES
Shares of the Fund are offered at a price equal to their net asset value
plus a sales charge which, at the option of the purchaser, may be imposed either
at the time of purchase (the "initial sales charge alternative") or on a
contingent deferred basis (the "deferred sales charge alternative"). Share
certificates will not be issued unless requested by the shareholder in writing,
and then only will be issued for full shares. The Board of Trustees reserves the
right to change or waive the minimum investment requirements and to reject any
order to purchase shares (including purchase by exchange) when in the judgment
of the Investment Adviser such rejection is in the Fund's best interest.
INITIAL SALES CHARGE ON CLASS A SHARES. The sales charges applicable to
purchases of Class A Shares of the Fund are described in the Fund's Class A and
Class B Prospectus. Methods of obtaining reduced sales charges referred to
generally in the Prospectus are described in detail below. In calculating the
sales charge applicable to current purchases of Class A Shares, the investor is
entitled to cumulate current purchases with the greater of the current value (at
offering price) of the Class A Shares of the Fund, or if Investor Services is
notified by the investor's dealer or the investor at the time of the purchase,
the cost of the Class A Shares owned.
COMBINED PURCHASES. In calculating the sales charge applicable to purchases
of Class A Shares made at one time, the purchases will be combined if made by
(a) an individual, his or her spouse and their children under the age of 21
purchasing securities for his or her own account, (b) a trustee or other
fiduciary purchasing for a single trust, estate or fiduciary account and (c)
certain groups of four or more individuals making use of salary deductions or
similar group methods of payment whose funds are combined for the purchase of
mutual fund shares. Further information about combined purchases, including
certain restrictions on combined group purchases, is available from Investor
Services or a Selling Broker's representative.
WITHOUT SALES CHARGE. As described in the Class A and Class B Prospectus,
Class A shares of the Fund may be sold without a sales charge to certain persons
described in the prospectus.
ACCUMULATION PRIVILEGE. Investors (including investors combining purchases)
who are already Class A Shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount then being invested but
also the purchase price or value of the Class A Shares already held by such
person.
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COMBINATION PRIVILEGE. Reduced sales charges (according to the schedule set
forth in the Class A and Class B Prospectus) also are available to an investor
based on the aggregate amount of his concurrent and prior investments in Class A
Shares of the Fund and shares of all other John Hancock funds which carry a
sales charge.
LETTER OF INTENTION. The reduced sales loads are also applicable to
investments made over a specified period pursuant to a Letter of Intention
(LOI), which should be read carefully prior to its execution by an investor. The
Fund offers two options regarding the specified period for making investments
under the LOI. All investors have the option of making their investments over a
period of thirteen (13) months. Investors who are using the Fund as a funding
medium for a qualified retirement plan, however, may not opt to make the
necessary investments called for by the LOI over a forty-eight (48) month
period. These qualified retirement plans include IRA'S, SEP, SARSEP, TSA, 401
(k) plans, TSA plans and 457 plans. Such an investment (including accumulations
and combinations) must aggregate $50,000 or more invested during the specified
period from the date of the LOI or from a date within ninety (90) days prior
thereto, upon written request to Investor Services. The sales charge applicable
to all amounts invested under the LOI is computed as if the aggregate amount
intended to be invested had been invested immediately. If such aggregate amount
is not actually invested, the difference in the sales charge actually paid and
the sales charge payable had the LOI not been in effect is due from the
investor. However, for the purchases actually made with the specified period
(either 13 or 48 months), the sales charge applicable will not be higher than
that which would have been applied (including accumulations and combinations)
had the LOI been for the amount actually invested.
The LOI authorizes Investor Services to hold in escrow sufficient Class A
shares (approximately 5%) of the aggregate to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the specified period, at which time
the escrow shares will be released. If the total investment specified in the LOI
is not completed, the Class A shares held in escrow may be redeemed and the
proceeds used as required to pay such sales charges as may be due. By signing
the LOI, the investor authorizes Investor Services to act as his
attorney-in-fact to redeem any escrowed shares and adjust the sales charge, if
necessary. A LOI does not constitute a binding commitment by an investor to
purchase, or by the Fund to sell, any additional shares and may be terminated at
any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
CONTINGENT DEFERRED SALES CHARGE. Investments in Class B shares are
purchased at net asset value per share without the imposition of a sales charge
so that the Fund will receive the full amount of the purchase payment. Class B
Shares which are redeemed within six years of purchase will be subject to a
contingent deferred sales charge ("CDSC") at the rates set forth in the Class A
and Class B Prospectus as a percentage of the dollar amount subject to the CDSC.
The charge will be assessed on an amount equal to the lesser of the current
market value or the original purchase cost of the Class B Shares being redeemed.
Accordingly, no CDSC will be imposed on increases in account value above the
initial purchase prices, including Class B Shares derived from reinvestment of
dividends or capital gains distributions.
The amount of the CDSC, if any, will vary depending on the number of years
from the time of payment for the purchase of Class B Shares until the time of
redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month.
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Proceeds from the CDSC are paid to the Distributor and are used in whole or
in part by the Distributor to defray its expenses related to providing
distribution-related services to the Fund in connection with the sale of the
Class B Shares, such as the payment of compensation to select Selling Brokers
for selling Class B Shares. The combination of the CDSC and the distribution and
service fees facilitates the ability of the Fund to sell the Class B Shares
without a sales charge being deducted at the time of the purchase. See the Class
A and Class B Prospectus for additional information regarding the CDSC.
SPECIAL REDEMPTIONS
Although it is the Fund's present policy to make payment of redemption
proceeds in cash, if the Board of Trustees determines that a material adverse
effect would otherwise be experienced by remaining investors, redemption
proceeds may be paid in whole or in part by a distribution in kind of securities
from the Fund in conformity with rules of the Securities and Exchange
Commission, valuing such securities in the same manner they are valued in
determining NAV, and selecting the securities in such manner as the Board may
deem fair and equitable. If such a distribution occurs, investors receiving
securities and selling them before their maturity could receive less than the
redemption value of such securities and, in addition, could incur certain
transaction costs. Such a redemption is not as liquid as a redemption paid in
cash or federal funds. The Fund has elected to be governed by Rule 18f-1 under
the 1940 Act, pursuant to which the Fund is obligated to redeem shares solely in
cash up to the lesser of $250,000 or 1% of the net asset value of the Fund
during any 90 day period for any one account.
ADDITIONAL SERVICES AND PROGRAM
EXCHANGE PRIVILEGE. As described more fully in the Class A and Class B
Prospectus, the Fund permits exchanges of shares of any class of the Fund for
shares of the same class in any other John Hancock fund offering that class.
SYSTEMATIC WITHDRAWAL PLAN. As described briefly in the Class A and Class B
Prospectus, the Fund permits the establishment of a Systematic Withdrawal Plan.
Payments under this plan represent proceeds arising from the redemption of Fund
shares. Since the redemption price of Fund shares may be more or less than the
shareholder's cost, depending upon the market value of the securities owned by
the Fund at the time of redemption, the distribution of cash pursuant to this
plan may result in realization of gain or loss for purposes of Federal, state
and local income taxes. The maintenance of a Systematic Withdrawal Plan
concurrently with purchases of additional Class A or Class B Shares of the Fund
could be disadvantageous to a shareholder because of the initial sales charge
payable on such purchases of Class A Shares and the CDSC imposed on redemptions
of Class B Shares and because redemptions are taxable events. Therefore, a
shareholder should not purchase Fund shares at the same time as a Systematic
Withdrawal Plan is in effect. The Fund reserves the right to modify or
discontinue the Systematic Withdrawal Plan of any shareholder on 30 days' prior
written notice to such shareholder, or to discontinue the availability of such
plan in the future. The shareholder may terminate the plan at any time by giving
proper notice to Fund Services.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM ("MAAP"). This program is explained
fully in the Fund's Class A and Class B Prospectus and the Account Privileges
Application. The program, as it relates to automatic investment checks, is
subject to the following conditions;
The investments will be drawn on or about the day of the month indicated.
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The privilege of making investments through the Monthly Automatic
Accumulation Program may be revoked by Investor Services without prior notice if
any investment is not honored by the shareholder's bank. The bank shall be under
no obligation to notify the shareholder as to the non-payment of any check.
The program may be discontinued by the shareholder either by calling
Investor Services or upon written notice to Investor Services which is received
at least five (5) business days prior to the due date of any investment.
REINVESTMENT PRIVILEGE. A shareholder who has redeemed Fund shares may,
within 120 days after the date of redemption, reinvest without payment of a
sales charge any part of the redemption proceeds in shares of the same class of
the Fund or another John Hancock mutual fund, subject to the minimum investment
limit in that fund. The proceeds from the redemption of Class A Shares may be
reinvested at net asset value without paying a sales charge in Class A Shares of
the Fund or in Class A Shares of another John Hancock mutual fund. If a CDSC was
paid upon a redemption, a shareholder may reinvest the proceeds from that
redemption at net asset value in additional shares of the class from which the
redemption was made. The shareholder's account will be credited with the amount
of any CDSC charged upon the prior redemption and the new shares will continue
to be subject to the CDSC. The holding period of the shares acquired through
reinvestment will, for purposes of computing the CDSC payable upon a subsequent
redemption, include the holding period of the redeemed shares. The Fund may
modify or terminate the reinvestment privilege at any time.
A redemption or exchange of Fund shares is a taxable transaction for Federal
income tax purposes. Even if the reinvestment privilege is exercised, and any
gain or loss realized by a shareholder on the redemption or other disposition of
Fund shares will be treated for tax purposes as described under the caption "Tax
Status."
DESCRIPTION OF THE FUND'S SHARES
SHARES OF THE FUND. Ownership of the Fund is represented by transferable
shares of beneficial interest. The Declaration of Trust permits the Trustees to
create an unlimited number of series and classes of shares of the Fund and, with
respect to each series and class, to issue an unlimited number of full or
fractional shares and to divide or combine the shares into a greater or lesser
number of shares without thereby changing the proportionate beneficial interests
of the Fund.
Each share of each series or class of the Fund represents an equal
proportionate interest with each other in that series or class, none having
priority or preference over other shares of the same series or class. The
interest of investors in the various series or classes of the Fund is separate
and distinct. All consideration received for the sales of shares of a particular
series or class of the Fund, all assets in which such consideration is invested
and all income, earnings and profits derived from such investments will be
allocated to and belong to that series or class. As such, each such share is
entitled to dividends and distributions out of the net income belonging to that
series or class as declared by the Board of Trustees. Shares of the Fund have a
par value of $0.01 per share. The assets of each series are segregated on the
Fund's books and are charged with the liabilities of that series and with a
share of the Fund's general liabilities. The Board of Trustees determines those
assets and liabilities deemed to be general assets or liabilities of the Fund,
and these items are allocated among each series in proportion to the relative
total net assets of each series. In the unlikely event that the liabilities
allocable to a series exceed the assets of that series, all or a portion of such
liabilities may have to be borne by the other series.
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Pursuant to the Declaration of Trust, the Trustees may authorize the
creation of additional series of shares (the proceeds of which would be invested
in separate, independently managed portfolios) and additional classes within any
series (which would be used to distinguish among the rights of different
categories of shareholders, as might be required by future regulations or other
unforeseen circumstances). As of the date of this Statement of Additional
Information, the Trustees have authorized the issuance of two classes of shares
of the Fund designated as Class A and Class B. Class A and Class B Shares of the
Fund represent an equal proportionate interest in the aggregate net asset values
attributable to that class of the Fund. Holders of Class A Shares and Class B
Shares each have certain exclusive voting rights on matters relating to the
Class A Plan and the Class B Plan, respectively. The different classes of the
Fund may bear different expenses relating to the cost of holding shareholder
meetings necessitated by the exclusive voting rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of shares
will be calculated in the same manner, at the same time and on the same day and
will be in the same amount, except for differences caused by the fact that (i)
Class B Shares will pay higher distribution and service fees than Class A Shares
and (ii) each of Class A Shares and Class B Shares will bear any class expenses
properly allocable to such class of shares, subject to the conditions set forth
in a private letter ruling that the Fund has received from the Internal Revenue
Service relating to its multiple- class structure. Similarly, the net asset
value per share may vary depending whether Class A Shares or Class B Shares are
purchased.
VOTING RIGHTS. Shareholders are entitled to a full vote for each full share
held. The Trustees themselves have the power to alter the number and the terms
of office of Trustees, and they may at any time lengthen their own terms or make
their terms of unlimited duration (subject to certain removal procedures) and
appoint their own successors, provided that at all times at least a majority of
the Trustees have been elected by shareholders. The voting rights of
shareholders are not cumulative, so that holders of more than 50 percent of the
shares voting can, if they choose, elect all Trustees being selected, while the
holders of the remaining shares would be unable to elect any Trustees. Although
the Fund need not hold annual meetings of shareholders, the trustees may call
special meetings of shareholders for action by shareholder vote as may be
required by the 1940 Act or the Declaration of Trust. Also, a shareholder's
meeting must be called if so requested in writing by the holders of record of
10% or more of the outstanding shares of the Fund. In addition, the Trustees may
be removed by the action of the holders of record of two-thirds or more of the
outstanding shares.
SHAREHOLDER LIABILITY. The Declaration of Trust provides that no Trustee,
officer, employee or agent of the Fund is liable to the Fund or to a
shareholder, nor is any Trustee, officer, employee or agent liable to any third
persons in connection with the affairs of the Fund, except as such liability may
arise from his or its own bad faith, willful misfeasance, gross negligence or
reckless disregard of his duties. It also provides that all third persons shall
look solely to the Fund's property for satisfaction of claims arising in
connection with the affairs of the Fund. With the exceptions stated, the
Declaration of Trust provides that a Trustee, officer, employee or agent is
entitled to be indemnified against all liability in connection with the affairs
of the Fund.
As a Massachusetts business trust, the Fund is not required to issue share
certificates. The Fund shall continue without limitation of time subject to the
provisions in the Declaration of Trust concerning termination by action of the
shareholders.
REPORTS TO SHAREHOLDERS. Shareholders of the Fund will receive annual and
semi-annual reports showing diversification of investments, securities owned and
other information regarding
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the Fund's activities. The financial statements of the Fund are audited at least
once a year by the Fund's independent auditors.
REGISTRATION STATEMENT. This Statement of Additional Information and the
Prospectus do not contain all of the information set forth in the Fund's
Registration Statement filed with the Securities and Exchange Commission. The
complete Registration Statement may be obtained from the Securities and Exchange
Commission upon payment of the fee prescribed by the rules and regulations of
the Commission.
TAX STATUS
The Fund has qualified and elected to be treated as a "regulated investment
company" under Subchapter M of the Internal Revenue Code of 1986, as amended
(the "Code"), and intends to continue to so qualify in the future. As such and
by complying with the applicable provisions of the Code regarding the sources of
its income, the timing of its distributions, and the diversification of its
assets, the Fund will not be subject to Federal income tax on taxable income
(including net short-term and long-term capital gains from the disposition of
portfolio securities or the right to when-issued securities prior to issuance,
or from the lapse, exercise, delivery under or closing out of options or futures
contracts, income from repurchase agreements and other taxable securities,
income attributable to accrued market discount, income from securities lending,
and a portion of the discount from certain stripped tax-exempt obligations or
their coupons) which is distributed to shareholders at least annually in
accordance with the timing requirements of the Code.
The Fund will be subject to a 4% non-deductible Federal excise tax on
certain amounts not distributed (and not treated as having been distributed) on
a timely basis in accordance with annual minimum distribution requirements. The
Fund intends under normal circumstances to avoid liability for such tax by
satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and profits
("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash. Amounts
that are not allowable as a deduction in computing taxable income, including
expenses associated with earning tax-exempt interest income, do not reduce
current E&P for this purpose. Distributions, if any, in excess of E&P will
constitute a return of capital, which will first reduce an investor's tax basis
in Fund shares and thereafter (after such basis is reduced to zero) will
generally give rise to capital gains. Shareholders electing to receive
distributions in the form of additional shares will have a cost basis for
Federal income tax purposes in each share so received equal to the amount of
cash they would have received had they elected to receive the distributions in
cash, divided by the number of shares received.
The Fund's distributions of tax-exempt interest ("exempt-interest
dividends") timely designated as such will be treated as tax-exempt interest
under the Code, provided that the Fund qualifies as a regulated investment
company and at least 50% of the value of its assets at the end of each quarter
of its taxable year is invested in tax-exempt obligations. Shareholders are
required to report their receipt of tax-exempt interest, including such
distributions, on their Federal income tax returns. The portion of the Fund's
distributions designated as exempt-interest dividends may differ from the actual
percentage that its tax-exempt income comprised of its total income during the
period of any particular shareholder's investment. The Fund will report to
shareholders the amount designated as exempt-interest dividends for each year.
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Interest income from certain types of tax-exempt bonds that are private
activity bonds in which the Fund may invest is treated as an item of tax
preference for purposes of the Federal alternative minimum tax. To the extent
that the Fund invests in these types of tax-exempt bonds, shareholders will be
required to treat as an item of tax preference for Federal alternative minimum
purposes that part of the Fund's exempt-interest dividends which is derived from
interest on these tax-exempt bonds. Exempt-interest dividends derived from
interest income from all tax-exempt bonds may be included in corporate "adjusted
current earnings" for purposes of computing the alternative minimum tax
liability, if any, of corporate shareholders of the Fund.
The amount of the Fund's net short-term and long-term capital gains, if any,
in any given year will vary depending upon the Adviser's current investment
strategy and whether the Adviser believes it to be in the best interest of the
Fund to dispose of portfolio securities or enter into options or futures
transactions that will generate capital gains. At the time of an investor's
purchase of Fund shares, a portion of the purchase price is often attributable
to realized or unrealized appreciation in the Fund's portfolio or, less
frequently, to undistributed taxable income of the Fund. Consequently,
subsequent distributions from such appreciation or income may be taxable to such
investor even if the net asset value of the investor's shares is, as a result of
the distributions, reduced below the investor's cost for such shares, and the
distributions in reality represent a return of a portion of the purchase price.
Upon a redemption of shares of the Fund (including by exercise of the
exchange privilege) a shareholder may realize a taxable gain or loss depending
upon his basis in his shares. Such gain or loss will be treated as capital gain
or loss if the shares are capital assets in the shareholder's hands and will be
long-term or short-term, depending upon the shareholder's tax holding period for
the shares. A sales charge paid in purchasing Class A shares of the Fund cannot
be taken into account for purposes of determining gain or loss on the redemption
or exchange of such shares within 90 days after their purchase to the extent
shares of the Fund or another John Hancock Fund are subsequently acquired
without payment of a sales charge pursuant to the reinvestment or exchange
privilege. Such disregarded load will result in an increase in the shareholder's
tax basis in the shares subsequently acquired. Also, any loss realized on a
redemption or exchange will be disallowed to the extent the shares disposed of
are replaced with identical or substantially identical securities within a
period of 61 days beginning 30 days before and ending 30 days after the shares
are disposed of, such as pursuant to an election to reinvest dividends in
additional shares. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized upon the redemption
of shares with a tax holding period of six months or less will be disallowed to
the extent of all exempt-interest dividends paid with respect to such shares
and, if not thus disallowed, will be treated as a long-term capital loss to the
extent of any amounts treated as distributions of long-term capital gain with
respect to such shares.
Although its present intention is to distribute all net short-term and
long-term capital gains, if any, the Fund reserves the right to retain and
reinvest all or any portion of its "net capital gain," which is the excess, as
computed for Federal income tax purposes, of net long-term capital gain over net
short-term capital loss in any year. The Fund will not in any event distribute
net capital gain realized in any year to the extent that a capital loss is
carried forward from prior years against such gain. To the extent such excess
was retained and not exhausted by the carry forward of prior years' capital
losses, it would be subject to Federal income tax in the hands of the Fund. Each
shareholder would be treated for Federal income tax purposes as if the Fund had
distributed to him on the last day of its taxable year his pro rata share of
such excess, and he had paid his pro rata share of the taxes paid by the Fund
and reinvested the remainder in the Fund. Accordingly, each shareholder would
(a) include his pro rata share of such excess as long-term capital gain income
in his return for his taxable year in which the last day of the Fund's taxable
year falls, (b) be entitled either to a tax credit on his return for, or to a
refund of, his pro rata share of the taxes paid by the
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Fund, and (c) be entitled to increase the adjusted tax basis for his shares in
the Fund by the difference between his pro rata share of such excess and his pro
rata share of such taxes.
For Federal income tax purposes, the Fund is generally permitted to carry
forward a net capital loss in any year to offset its net capital gains, if any,
during the eight years following the year of the loss. To the extent subsequent
net capital gains are offset by such losses, they would not result in Federal
income tax liability to the Fund and, as noted above, would not be distributed
as such to shareholders. The Fund has $7,349,795 of capital loss carry forwards,
which expire in 2002, available to offset future net capital gains.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Fund will not be deductible for Federal income tax purposes to the
extent it is deemed related to exempt-interest dividends paid by the Fund.
Pursuant to published guidelines, the Internal Revenue Service may deem
indebtedness to have been incurred for the purpose of purchasing or carrying
shares of the Fund even though the borrowed funds may not be directly traceable
to the purchase of shares.
Dividends paid by the Fund to its corporate shareholders will not qualify
for the corporate dividends received deduction in their hands.
If the Fund invests in zero coupon securities or, in general, any other
securities with original issue discount (or with market discount if the Fund
elects to include accrued market discount in income currently), the Fund must
accrue income on such investments prior to the receipt of the corresponding cash
payments. However, the Fund must distribute, at least annually, all or
substantially all of its net income, including such accrued income, to
shareholders to qualify as a regulated investment company under the Code and
avoid Federal income and excise taxes. Therefore, the Fund may have to dispose
of its portfolio securities under disadvantageous circumstances to generate
cash, or may have to leverage itself by borrowing the cash, to satisfy
distribution requirements.
Limitations imposed by the Code on regulated investment companies like the
Fund may restrict the Fund's ability to enter into futures and options
transactions.
Certain options and futures transactions undertaken by the Fund may cause
the Fund to recognize gains or losses from marking to market even though its
positions have not been sold or terminated and affect the character as long-term
or short-term and timing of some capital gains and losses realized by the Fund.
Also, certain of the Fund's losses on its transactions involving options or
futures contracts and/or offsetting portfolio positions may be deferred rather
than being taken into account currently in calculating the Fund's gains. These
transactions may therefore affect the amount, timing and character of the Fund's
distributions to shareholders. Certain of the applicable tax rules may be
modified if the Fund is eligible and chooses to make one or more of certain tax
elections that may be available. The Fund will take into account the special tax
rules (including consideration of available elections) applicable to options and
futures contracts in order to minimize any potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law as
applicable to U.S. persons (i.e., U.S. citizens or residents and U.S. domestic
corporations, partnerships, trusts or estates) subject to tax under such law.
The discussion does not address special tax rules applicable to certain classes
of investors, such as tax-exempt entities, insurance companies, and financial
institutions. Dividends, capital gain distributions, and ownership of or gains
realized on the redemption (including an exchange) of Fund shares may also be
subject to state and local taxes. Shareholders should consult their own tax
advisers as to the Federal, state or local tax
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consequences of ownership of shares of, and receipt of distributions from, the
Fund in their particular circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which their
investment in the Fund is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to nonresident alien withholding tax at the rate of 30%
(or a lower rate under an applicable tax treaty) on amounts treated as ordinary
dividends from the Fund and, unless an effective IRS Form W-8 or authorized
substitute is on file, to 31% backup withholding on certain other payments from
the Fund. Non- U.S. investors should consult their tax advisers regarding such
treatment and the application of foreign taxes to an investment in the Fund.
The Fund is not subject to Massachusetts corporate excise or franchise
taxes. Provided that the Fund qualifies as a regulated investment company under
the Code, it will also not be required to pay any Massachusetts income tax.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and the
allocation of brokerage commissions are made by the Investment Adviser pursuant
to recommendations made by its investment committee, which consists of officers
and directors of the Investment Adviser and affiliates and officers and Trustees
who are interested persons of the Fund. Orders for purchases and sales of
securities are placed in a manner which, in the opinion of the Investment
Adviser, will offer the best price and market for the execution of each such
transaction. Purchases from underwriters of portfolio securities may include a
commission or commissions paid by the issuer and transactions with dealers
serving as market makers reflect a "spread." Investments in debt securities are
generally traded on a net basis through dealers acting for their own account as
principals and not as brokers; no brokerage commissions are payable on such
transactions.
The Fund's primary policy is to execute all purchases and sales of portfolio
instruments at the most favorable prices consistent with best execution,
considering all of the costs of the transaction including brokerage commissions.
This policy governs the selection of brokers and dealers and the market in which
a transaction is executed. Consistent with the foregoing primary policy, the
Rules of Fair Practice of the NASD and other policies that the Trustees may
determine, the Investment Adviser may consider sales of shares of the Fund as a
factor in the selection of broker-dealers to execute the Fund's portfolio
transactions.
To the extent consistent with the foregoing, the Fund will be governed in
the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and to a lesser extent statistical assistance furnished to the Investment
Adviser of the Fund, and their value and expected contribution to the
performance of the Fund. It is not possible to place a dollar value on
information and services to be received from brokers and dealers, since it is
only supplementary to the research efforts of the Investment Adviser. The
receipt of research information is not expected to reduce significantly the
expenses of the Investment Adviser. The research information and statistical
assistance furnished by brokers and dealers may benefit the Life Company or
other advisory clients of the Investment Adviser, and conversely, brokerage
commissions and spreads paid by other advisory clients of the Investment Adviser
may result in research information and statistical assistance beneficial to the
Fund. The Fund will make no commitments to allocate portfolio transactions upon
any prescribed basis. While the Fund's officers will be primarily responsible
for the allocation of the Fund's brokerage business, their
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policies and practices in this regard must be consistent with the foregoing and
will at all times be subject to review by the Trustees. For the fiscal years
ended December 31, 1994, 1993 and 1992, no negotiated brokerage commissions were
paid on portfolio transactions.
As permitted by Section 28(e) of the Securities Exchange Act of 1934, the
Fund may pay to a broker which provides brokerage and research services to the
Fund an amount of disclosed commission in excess of the commission which another
broker would have charged for effecting that transaction. This practice is
subject to a good faith determination by the Trustees that the price is
reasonable in light of the services provided and to policies that the Trustees
may adopt from time to time. During the fiscal year ended December 31, 1994, the
Fund did not pay commissions as compensation to any brokers for research
services such as industry, economic and company reviews and evaluations of
securities.
The Investment Adviser's indirect parent, the Life Company, is the indirect
sole shareholder of John Hancock Freedom Securities Corporation and its
subsidiaries, three of which, Tucker Anthony Incorporated ("Tucker Anthony")
John Hancock Distributors, Inc. ("John Hancock Distributors") and Sutro &
Company, Inc. ("Sutro"), are broker-dealers ("Affiliated Brokers"). Pursuant to
procedures determined by the Trustees and consistent with the above policy of
obtaining best net results, the Fund may execute portfolio transactions with or
through Tucker Anthony, Sutro or John Hancock Distributors. During the year
ended December 31, 1994, the Fund did not execute any portfolio transactions
with then affiliated brokers.
Any of the Affiliated Brokers may act as broker for the Fund on exchange
transactions, subject, however, to the general policy of the Fund set forth
above and the procedures adopted by the Trustees pursuant to the 1940 Act.
Commissions paid to an Affiliated Broker must be at least as favorable as those
which the Trustees believe to be contemporaneously charged by other brokers in
connection with comparable transactions involving similar securities being
purchased or sold. A transaction would not be placed with an Affiliated Broker
if the Fund would have to pay a commission rate less favorable than the
Affiliated Broker's contemporaneous charges for comparable transactions for its
other most favored, but unaffiliated, customers, except for accounts for which
the Affiliated Broker acts as a clearing broker for another brokerage firm, and
any customers of the Affiliated Broker not comparable to the Fund as determined
by a majority of the Trustees who are not interested persons (as defined in the
1940 Act) of the Fund, the Investment Adviser or the Affiliated Brokers. Because
the Investment Adviser, which is affiliated with the Affiliated Brokers, has, as
an investment adviser to the Fund, the obligation to provide investment
management services, which includes elements of research and related investment
skills, such research and related skills will not be used by the Affiliated
Brokers as a basis for negotiating commissions at a rate higher than that
determined in accordance with the above criteria. The Fund will not effect
principal transactions with Affiliated Brokers.
The Fund's portfolio turnover rates for the fiscal years ended December 31,
1993 and 1994 were 116% and 107%, respectively.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation, P.O. Box 9116, Boston, MA
02205-9116, a wholly owned indirect subsidiary of the Life Company, is the
transfer and dividend paying agent for the Fund. The Fund pays Investor Services
a monthly transfer agent fee of $19 per account for the Class A Shares and
$22.50 per account for the Class B Shares, plus out-of-pocket expenses.
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<PAGE> 139
INDEPENDENT AUDITORS
Ernst & Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116, has
been selected as the independent auditors of the Fund. The financial statements
of the Fund included in the Prospectus and this Statement of Additional
Information have been audited by Ernst & Young LLP for the periods indicated in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
CUSTODY OF PORTFOLIO
Investor Bank and Trust ("IBT") 24 Federal Street, Boston, Massachusetts,
serves as custodian of the cash and investment securities of the Fund. IBT is
also responsible for, among other things, receipt and delivery of the Fund's
investment securities in accordance with procedures and conditions specified in
the custody agreement.
CALCULATION OF PERFORMANCE
For the 30-day period ended December 31, 1994, the annualized yields of the
Fund's Class A Shares and Class B Shares were 6.13% and 5.68%, respectively.
As of December 31, 1994, the average annual total returns of the Class A
Shares of the Fund for the one year period and since inception on January 1,
1990 were -13.61% and 6.11%, respectively (-13.71% and 5.74%, respectively,
without taking into account the expense limitation arrangements). As of December
31, 1994, the average annual returns for the Fund's Class B Shares for the one
year period and since inception on December 31, 1991 were -15.05% and 3.31%,
respectively (-15.05% and 3.11%, respectively, without taking into account the
expense limitation arrangements).
The Fund's yield is computed by dividing net investment income per share
determined for a 30-day period by the maximum offering price per share (which
includes the full sales charge) on the last day of the period, according to the
following standard formula:
Yield = 2 [ (a-b + 1 )6 -1]
---
cd
Where:
a= dividends and interest earned during the period.
b= net expenses accrued during the period.
c= the average daily number of fund shares outstanding during the period
that would be entitled to receive dividends.
d= the maximum offering price per share on the last day of the period (NAV
where applicable).
The Fund may advertise a tax-equivalent yield, which is computed by dividing
that portion of the yield of the Fund which is tax-exempt by one minus a stated
income tax rate and adding the product to that portion, if any, of the yield of
the Fund that is not tax-exempt. The tax equivalent yields for the Fund's Class
A and Class B Shares at the maximum 36% tax rate for the 30-day period ended
December 31, 1994 were 9.70% and 9.40%, respectively.
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<PAGE> 140
The Fund's total return is computed by finding the average annual compounded
rate of return over the 1-year, 5-year, and 10-year periods that would equate
the initial amount invested to the ending redeemable value according to the
following formula:
P(1 + T)n = ERV
Where:
P= a hypothetical initial investment of $1,000.
T= average annual total return
n= number of years
ERV= ending redeemable value of a hypothetical $1,000 investment made at the
beginning of the 1-year and life-of-fund periods.
In the case of Class A Shares or Class B Shares, this calculation assumes
the maximum sales charge is included in the initial investment or the CDSC is
applied at the end of the period. This calculation also assumes that all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period.
In addition to average annual total returns, the Fund may quote unaveraged
or cumulative total returns reflecting the simple change in value of an
investment over a stated period. Cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions, over any time period.
Total returns may be quoted with or without taking the Fund's maximum sales
charge on Class A Shares or the CDSC on Class B Shares into account. Excluding
the Fund's sales charge on Class A Shares and the CDSC on Class B Shares from a
total return calculation produces a higher total return figure.
From time to time, in reports and promotional literature, the Fund's yield
and total return will be compared to indices of mutual funds and bank deposit
vehicles such as Lipper Analytical Services, Inc.'s "Lipper -- Fixed Income Fund
Performance Analysis," a monthly publication which tracks net assets, total
return, and yield on approximately 1,700 fixed income mutual funds in the United
States. Ibottson and Associates, CDA Weisenberger and F.C. Towers are also used
for comparison purposes, as well a the Russell and Wilshire Indices.
Performance rankings and ratings reported periodically in national financial
publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL STREET
JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will also be
utilized. The Fund's promotional and sales literature may make reference to the
Fund's "beta." Beta is a reflection of the market-related risk of the Fund by
showing how responsive the Fund is to the market.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
the Fund's performance.
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<PAGE> 141
ADDITIONAL PERFORMANCE INFORMATION. The Fund may use comparative performance
information from certain industry research materials and/or published in various
periodicals. The characteristics of the investments in such comparisons may be
different from those investments of the Fund's portfolio. In addition, the
formula used to calculate the performance statistics of such investments may not
be identical to the formula used by the Fund to calculate its performance
figures. From time to time, advertisements or information for the Fund may
include a discussion of certain attributes or benefits to be derived by an
investment in the Fund. Such advertisements or information may include symbols,
headlines or other material which highlight or summarize the information
discussed in more detail in the communication.
The following publications, indexes, averages and investments which may be
used in advertisements or information concerning the Fund for dissemination to
investors or shareholders, include, but are not limited, to:
a) Dow Jones Composite Average or its component averages - an unmanaged
index composed of 30 blue-chip industrial corporation stocks (Dow Jones
Industrial Average), 15 utilities company stocks (Dow Jones Utilities
Average), and 20 transportation company stocks. Comparisons of performance
assume reinvestment of dividends.
b) Standard & Poor's 500 Stock Index or its component indices - an unmanaged
index composed of 400 industrial stocks, 40 financial stocks, 40 utilities
stocks, and 20 transportation stocks. Comparisons of performance assume
reinvestment of dividends.
c) The New York Stock Exchange composite or component indices - unmanaged
indices of all industrial, utilities, transportation, and finance stocks
listed on the New York Stock Exchange.
d) Wilshire 5000 Equity Index - represents the return on the market value of
all common equity securities of which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
e) Lipper - Mutual Fund Performance Analysis, Lipper - Fixed Income
Analysis, and Lipper Mutual Fund indices - measure total return and average
current yield for the mutual fund industry. Ranks individual mutual fund
performance over specified time periods assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
f) CDA Mutual Fund Report, published by CDA Investment Technologies, Inc. -
analyzes price, current yield, risk, total return, and average rate of
return (average annual compounded growth rate) over specified time periods
for the mutual fund industry.
g) Mutual Fund Source Book and other similar rating publications by
Morningstar, Inc. - independent performance monitor of equity and fixed
income mutual funds. Morningstar ratings (ranging from one star for lowest
and five stars for highest) are based on analysis of a fund's ratio, i.e.,
price yield, risk (volatility) and total return, including all loads and
fees, compared with similar funds for three-, five- and ten-year periods.
h) Financial publications: Barrons, Business Week, Personal Finance,
Financial World, Forbes, Fortune, "The Wall Street Journal", "New York
Times", Weisenberger Investment Companies Service, Institutional Investor,
and Money - rate fund performance over specified time periods and provide
other relative performance or industry information.
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<PAGE> 142
i) Consumer Price Index (or Cost of Living Index), published by the U. S.
Bureau of Labor Statistics - a statistical measure of change, over time, in
the price of goods and services in major expenditure groups.
j) Stocks, Bonds, Bills, and Inflation, published by Ibbotson Associates -
historical measure of yield, price, and total return for common and small
company stock, long-term government bonds, Treasure bills, and inflation.
k) Savings and Loan Historical Interest Rates - as published in the U. S.
Savings & Loan League Fact Book.
l) Salomon Brothers Broad Bond Index or its component indices - The Broad
Index measures yield, price and total return for Treasury, Agency,
Corporate, and Mortgage bonds.
m) Salomon Brothers Composite High Yield Index or its component indices -
The High Yield Index measures yield, price and total return for Long-Term
High-Yield Index, Intermediate-Term High-Yield index and Long-Term Utility
High-Yield Index.
n) Shearson Lehman Brothers Aggregate Bond index or its component indices
(including Municipal Bond Index) - The Aggregate Bond Index measures yield,
price and total return for Treasury, Agency, Corporate, Mortgage, and Yankee
bonds.
o) Standard & Poor's Bond Indices - measure yield and price of Corporate,
Municipal, and government bonds.
p) Other taxable investments, including certificates of deposit (CDs), money
market deposit accounts (MMDAs), checking accounts, savings accounts, money
market mutual funds, and repurchase agreements.
q) Historical data supplied by the research departments of Shearson Lehman
Hutton, First Boston Corporation, Morgan Stanley, Salomon Brothers, Merrill
Lynch, and Donaldson Lufkin and Jenrette.
r) Donoghues's Money Fund Report - industry averages for 7-day annualized
and compounded yields of taxable, tax-free and government money funds.
s) Russell 2000 (small capitalization stock index), Bond Buyer 25 Revenue
Bond Index and other indices as may from time to time become available.
t) The Value Line Mutual Fund Survey, published by Value Line, assigns
rankings of 1 (best) to 5 (worst) in terms of risk adjusted performance
covering more than 2,000 equity and fixed income mutual funds.
From time to time, in reports and promotional literature, the Fund's
performance will be compared to other mutual funds and investment vehicles such
as F.C. Towers.
In addition, advertisements and sales materials may from time to time,
contain hypothetical performance examples for purposes of illustrating
reinvestment (or "compounding") of dividends at fixed rates of return or tax
advantages to be derived from deferring payment of federal (and state) income
taxes (at maximum rates) as compared to taxable investments assuming fixed rates
of return. Illustrations may also include (1) hypothetical investments in
various
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<PAGE> 143
retirement plans, such as IRAs, made by investors of various ages or (2)
comparisons to retirement plans funded by annuity or bank products.
In assessing such comparisons, an investor should consider the following
factors:
a) It is generally either not possible or not practicable to invest in an
average or index of certain investments.
b) Certificates of deposit issued by banks and other depository institutions
represent an alternative income producing product. Certificates of deposit
may offer fixed or variable interest rates and principal is guaranteed and
may be insured. Withdrawal of deposits prior to maturity will normally be
subject to a penalty. Rates offered by banks and other depository
institutions are subject to change at any time specified by the issuing
institution.
The Fund may from time to time advertise its comparative performance as
measured or refer to results published by various periodicals including, but not
limited to, Lipper Analytical Services, Inc. Barron's, "The Wall Street
Journal", "New York Times", Weisenberger Investment Companies Service,
Donoghue's Money Fund Report, Stanger's Investment Advisor, Financial Planning,
Money, Fortune, Personal Finance, Muni Week, Institutional Investor, Business
Week, Financial World and Forbes. In addition, the Fund may from time to time
advertise its performance relative to certain indexes and benchmark investments,
including: (a) the Shearson Lehman Municipal Bond Index, (b) Bond Buyer 25
Review Bond Index, (c) the Consumer Price Index, and (d) taxable investments
such as certificates of deposit, money market deposit accounts, checking
accounts, savings accounts, money market mutual funds.
The composition of the investments in such indexes and the characteristics
of such benchmark investments are not identical to, and in some cases are very
different from, those of the Fund's portfolio. These indexes and averages are
generally unmanaged and the items included in the calculations of such indexes
and averages may not be identical to the formulas used by the Fund to calculate
its performance figures.
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<PAGE> 144
APPENDIX A
CORPORATE AND TAX-EXEMPT BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. ("MOODY'S)
ASS, AA, A AND BAA - Tax-exempt bonds rated Aaa are judged to be of the
"best quality." The rating of Aa is assigned to bonds that are of "high quality
by all standards," but long-term risks appear somewhat larger than Aaa rated
bonds. The Aaa and Aa rated bonds are generally known as "high grade bonds." The
foregoing ratings for tax-exempt bonds are rated conditionally. Bonds for which
the security depends upon the completion of some act or upon the fulfillment of
some condition are rated conditionally. These are bonds secured by (a) earnings
of projects under construction, (b) earnings of projects unseasoned in operation
experience, (c) rentals that begin when facilities are completed, or (d)
payments to which some other limiting condition attaches. Such parenthetical
ratings denotes the probable credit stature upon completion of construction or
elimination of the basis of the condition. Bonds rated A are considered as upper
medium grade obligations. Principal and interest are considered adequate, but
elements may be present which suggest a susceptibility to impairment sometime in
the future. Bonds rated Baa are considered a medium grade obligations; i.e.,
they are neither highly protected or poorly secured. Interest payments and
principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact, have speculative characteristics as well.
STANDARD & POOR'S CORPORATION ("S&P")
AAA, AA, A AND BBB - Bonds rated AAA bear the highest rating assigned to
debt obligations and indicates an extremely strong capacity to pay principal and
interest. Bonds rated AA are considered "high grade," are only slightly less
marked than those of AAA ratings and have the second strongest capacity for
payment of debt service. Bonds rated A have a strong capacity to pay principal
and interest, although they are somewhat susceptible to the adverse effects or
changes in circumstances and economic conditions. The foregoing ratings are
sometimes followed by a "p" indicating that the rating is provisional. A
provisional rating assumes the successful completion of the project financed by
the bonds being rated and indicates that payment of debt service requirements is
largely or entirely dependent upon the successful and timely completion of the
project. Although a provisional rating addresses credit quality subsequent of
completion of the project, it makes no comment on the likelihood of, or the risk
of default upon failure of, such completion. Bonds rated BBB are regarded as
having an adequate capacity to repay principal and pay interest. Whereas they
normally exhibit protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to repay principal
and pay interest for bonds in this category than for bonds in the A category.
FITCH INVESTORS SERVICE ("FITCH")
AAA, AA, A, BBB - Bonds rated AAA are considered to be investment grade and
of the highest quality. The obligor has an extraordinary ability to pay interest
and repay principal, which is unlikely to be affected by reasonably foreseeable
events. Bonds rated AA are considered to be investment grade and of high
quality. The obligor's ability to pay interest and repay principal, while very
strong, is somewhat less than for AAA rated securities or more subject to
possible change over the term of the issue. Bonds rated A are considered to be
investment grade and of
A-1
<PAGE> 145
good quality. The obligor's ability to pay interest and repay principal is
considered to be strong, but may be more vulnerable to adverse changes in
economic conditions and circumstances than bonds with higher ratings. Bonds
rated BBB are considered to be investment grade and of satisfactory quality. The
obligor's ability to pay interest and repay principal is considered to be
adequate. Adverse changes in economic conditions and circumstances, however, are
more likely to weaken this ability than bonds with higher ratings.
TAX-EXEMPT NOTE RATINGS
MOODY'S - MIG-1 AND MIG-2. Notes rated MIG-1 are judged to be of the best
quality, enjoying strong protection from established cash flow or funds for
their services or from established and broad-based access to the market for
refinancing or both. Notes rated MIG-2 are judged to be of high quality with
ample margins of protection, though not as large as MIG-1.
S&P - SP-1 AND SP-2. SP-1 denotes a very strong or strong capacity to pay
principal and interest. Issues determined to possess overwhelming safety
characteristics are given a plus (+) designation (SP-1+). SP-2 denotes a
satisfactory capacity to pay principal interest.
FITCH - FIN-1 AND FIN-2. Notes assigned FIN-1 are regarded as having the
strongest degree of assurance for timely payment. A plus symbol may be used to
indicate relative standing. Notes assigned FIN-2 reflect a degree of assurance
for timely payment only slightly less in degree than the highest category.
CORPORATE AND TAX-EXEMPT COMMERCIAL PAPER RATINGS
MOODY'S - Commercial Paper ratings are opinions of the ability of issuers to
repay punctually promissory obligations not having an original maturity in
excess of nine months. Prime-1, indicates highest quality repayment capacity of
rated issue and Prime-2 indicates higher quality.
S&P - Commercial Paper ratings are a current assessment of the likelihood of
timely payment of debts having an original maturity of no more than 365 days.
Issues rated A have the greatest capacity for a timely payment and the
designation 1, 2 and 3 indicates the relative degree of safety. Issues rated
"A-1+" are those with an "overwhelming degree of credit protection."
FITCH - Commercial Paper ratings reflect current appraisal of the degree of
assurance of timely payment. F-1 issues are regarded as having the strongest
degree of assurance for timely payment. (+) is used to designate the relative
position of an issuer within the rating category. F-2 issues reflect an
assurance of timely payment only slightly less in degree than the strongest
issues. The symbol (LOC) may follow either category and indicates that a letter
of credit issued by a commercial bank is attached to the commercial paper note.
OTHER CONSIDERATIONS - The ratings of S&P, Moody's, and Fitch represent
their respective opinions of the quality of the municipal securities they
undertake to rate. It should be emphasized, however, that ratings are general
and are not absolute standards of quality. Consequently, municipal securities
with the same maturity, coupon and ratings may have different yields and
municipal securities of the same maturity and coupon with different ratings may
have the same yield.
A-2
<PAGE> 146
FINANCIAL STATEMENTS
The Fund's financial statements at December 31, 1994 are incorporated
by reference to the filing: 1994 Annual Report to Shareholders, as filed with
the Securities and Exchange Commission on March 6, 1995 (accession number:
0000950135-95-000632)
F-1
<PAGE> 147
John Hancock Funds
- --------------------------------------------------------------------------------
TAX-FREE
BOND
FUND
ANNUAL REPORT
December 31, 1995
<PAGE> 148
TRUSTEES
EDWARD J. BOUDREAU, JR.
JAMES F. CARLIN*
WILLIAM H. CUNNINGHAM*
CHARLES F. FRETZ*
HAROLD R. HISER, JR.*
CHARLES L. LADNER*
LEO E. LINBECK*
PATRICIA P. MCCARTER*
STEVEN R. PRUCHANSKY*
LT. GEN. NORMAN H. SMITH, USMC (RET.)*
JOHN P. TOOLAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
THOMAS H. DROHAN
Senior Vice President and Secretary
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President and Compliance Officer
JAMES J. STOKOWSKI
Vice President and Treasurer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
89 SOUTH STREET
BOSTON, MASSACHUSETTS 02111
TRANSFER AGENT
JOHN HANCOCK INVESTOR SERVICES CORPORATION
P.O. BOX 9116
BOSTON, MASSACHUSETTS 02205-9116
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
The stock market's record-breaking, whirlwind performance in 1995 will be a
tough act to follow in 1996. In fact, we've already seen greater market
volatility this year, particularly among last year's leaders -- technology
stocks. That's to be expected after a year that saw market indexes soar,
including the Standard & Poor's 500-Stock Index's 37% advance. While many of the
same economic conditions that fostered the stellar 1995 market are still in
place -- slow economic growth, muted inflation and decent corporate earnings --
it would be unrealistic to expect the market to stage a repeat in 1996. The old
saying "trees don't grow to the sky" comes to mind. Shareholders would do well
to temper expectations of investment returns and perhaps revisit their
investment allocations with their financial advisor to determine if rebalancing
their portfolio makes sense.
No matter how you scale back your market expectations, you should always
be able to count on consistent customer service performance. At John Hancock
Funds, we never stop working to find ways to sustain and improve the quality of
information and the level of assistance we provide you. Our commitment to this
task is no less than John Hancock's loyalty was to his fledgling country when he
is said to have uttered, "if it does the public good, burn Boston." We won't go
that far, of course, but we share our namesake's dedication to putting the
public before all else.
In our case, that public is you, our shareholders. We take very seriously
the role you have entrusted to us, that of helping you achieve your financial
goals. Part of that will always involve good customer service. So please do not
hesitate to call your Customer Service Representative at 1-800-225-5291 if you
have any questions or need information. We take pride in helping you with the
same spirit that John Hancock displayed at the dawning of America.
Sincerely,
/s/ Edward J. Boudreau, Jr.
- ---------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE> 149
BY THOMAS C. GOGGINS
FOR THE PORTFOLIO MANAGEMENT TEAM
JOHN HANCOCK
TAX-FREE BOND FUND
"SOFT LANDING" HELPED BOOST MUNICIPAL PRICES IN 1995
Slowing economic growth and easing inflationary pressures provided the backdrop
for an unexpectedly strong bond market rally in 1995. The year got off to an
impressive start as more investors came to accept that the Federal Reserve Board
could actually engineer a "soft landing" -- in which economic growth is slow but
steady and inflation remains low. The first quarter was particularly strong for
municipal bonds, which outpaced Treasury, mortgage and corporate bonds alike.
[A 2 1/4" x 3" photo of Thomas C. Goggins at bottom right. Caption reads:
"Thomas C. Goggins".]
However, various tax-reform proposals grabbed the headlines in the second
quarter and stymied the rise of municipals. At issue was the notion that some
proposals, particularly the flat-tax proposal, could eliminate any need for
investors to own tax-exempt securities. But by the fall, municipals started to
regain some steam. Two interest-rate cuts in the last two quarters of the year,
coupled with rising demand for municipals from some institutional investors,
ignited another round of strength. By the end of 1995, municipals had turned in
their best performance since 1986.
A LOOK AT PERFORMANCE
John Hancock Tax-Free Bond Fund performed well, not only in absolute terms, but
also compared to its competitors. For the year ended December 31, 1995, the
Fund's Class A and Class B shares posted total returns of 20.20% and 19.41%,
respectively, at net asset value. Those returns outpaced the average general
municipal bond fund's return of 16.84% for the same period, according to Lipper
Analytical Services.(1)
There were several factors contributing to the Fund's better-than-average
performance. First was duration, which measures how sensitive
[CAPTION]
"BY THE END OF 1995, MUNICIPALS HAD TURNED IN THEIR
BEST PERFORMANCE SINCE 1986."
3
<PAGE> 150
John Hancock Funds - Tax-Free Bond Fund
[Chart with heading "Top Five Sectors" at top of left hand column. The chart
lists five sectors: 1) Transportation 21%; 2) Electric Utilities 18%; 3) Health
18%; 4) General Obligation Bonds 11%; 5) Pollution Control 10%. Footnote below
reads: "As a percentage of net assets on December 31, 1995."]
the Fund's share price is to changes in interest rates. In the first quarter of
the year, the Fund's duration was relatively long, which benefited its
performance when interest rates were falling. In the second quarter we reduced
our duration by replacing some longer-term bonds with shorter-term bonds. We did
that because there wasn't much difference in yield between short- and long-term
bonds. In other words, we did not give up a great amount of yield to own the
less volatile, shorter-term bonds. That strategy also paid off because the
second quarter was a particularly volatile period for municipal bonds. By the
fall, however, we felt that interest rates could resume their decline, so we
made the Fund more interest-rate sensitive by lengthening our duration again.
Having a longer duration during the second half of the year also helped our
performance.
Our continued focus on non-callable bonds was also an advantage for the
Fund. Non-callable bonds are so-called because they can't be redeemed by their
issuer before their scheduled maturity dates. They tended to benefit more fully
from the bond market rally than callable bonds. A bond with a call will trade
under the assumption that the issuer will call the bond -- or pay it off -- on
the call provision date, which is the first date it can be redeemed by its
issuer. As the call date approaches, callable bonds are less likely to
participate fully in a rally. Non-callable bonds also offer another advantage:
they provide a predictable and steady stream of income. If interest rates
decline further, our non-callable bonds can't be redeemed early, so we won't be
forced to put the proceeds from calls back to work in the market at lower
interest rates.
Finally, we focused on buying discount bonds, which sell below par (face)
value. During periods when interest rates are declining, discount bonds tend to
appreciate more than par bonds, and more than premium bonds, which trade above
par value.
FOCUS ON SECTORS
Transportation bonds made up the Fund's largest sector concentration at about
21% of net assets at the end of 1995. During the period we added several
industrial development bonds in the airline sector, which our team of analysts
identified as having good prospects for appreciation. Dallas/Fort Worth issued
bonds to construct additional gates for American Airlines at the airport.
Indianapolis issued bonds for a United Airlines maintenance facility. These
[Table entitled "Scorecard" at bottom left hand column. The header for the left
column is "Category"' the header for the right column is "Trend...and what's
driving it." The first listing is "Dallas/Fort Worth/American Airlines" followed
by an up arrow and the phrase "Improving profitability for airline". The second
listing is "Indianapolis/United Airlines" followed by an up arrow and the phrase
"Better earnings for UAL". The third listing is "Housing bonds" followed by a
flat arrow and the phrase "Rising risk of prepayments". Footnote below reads:
"See "Schedule of Investments." Investment holdings are subject to change."]
[CAPTION]
"...FOCUS ON NON-CALLABLE BONDS WAS ALSO AN ADVANTAGE FOR THE FUND."
4
<PAGE> 151
John Hancock Funds - Tax-Free Bond Fund
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the year ended December 31, 1995." The chart is
scaled in increments of 5% from bottom to top, with 25% at the top and 0% at the
bottom. Within the chart there are three solid bars. The first represents the
20.20% total return for John Hancock Tax-Free Bond Fund: Class A. The second
represents the 19.41% total return for John Hancock Tax-Free Bond Fund: Class B.
The third represents the 16.84% total return of the average general municipal
bond fund. A footnote below states: "Total returns for John Hancock Tax-Free
Bond Fund are at net asset value with all distributions reinvested. The average
general municipal bond fund is tracked by Lipper Analytical Services. See
following page for historical performance information."]
were two of the Fund's largest holdings and best performers for the year.
Housing bonds, which posted weak gains during 1995, were the municipal
market's laggards. These bonds were held back by the perception that mortgages
underlying these housing bonds would be refinanced as interest rates fall.
However, we've maintained a core holding in high-quality, high-yielding housing
bonds that we think are less vulnerable to early payment.
The Fund's Trustees recently voted to give the Fund the flexibility to
invest as much as one-third of its assets in high-yielding bonds that carry
below investment-grade ratings. We plan to be selective in adding these bonds,
buying them only when we think that they offer enough reward to justify the risk
taken.
OUTLOOK
Political haggling over various tax-reform proposals could continue to draw
headlines in 1996. If that is the case, the municipal bond market could
experience further volatility in the months to come. We think it's unlikely that
any significant tax reform will be enacted within the next two years. And we're
not convinced that the flat tax is viable. So in our view, the market has
overreacted. We believe that the tax-reform scare has actually created an
opportunity. At the end of 1995, municipals were priced attractively compared to
Treasuries. In fact, there was only one other time in recent history that
municipals were this cheap relative to Treasuries. In our experience, it is in
times like these that municipals offer good value for investors seeking
after-tax income.
It may be difficult for municipals to achieve the same exceptional gains
they made in 1995. However, there are several reasons why we're optimistic about
1996. We believe economic growth will continue to slow, inflation will remain
subdued and, as a result, interest rates could continue to fall. Since bond
prices generally move in the opposite direction of interest rates, that could be
good news for bonds. What's more, the supply of new municipals issued should
remain relatively weak. And if demand stays constant or improves, that too could
be a positive.
- --------------------------------------------------------------------------------
(1) Figures from Lipper Analytical Services include reinvested dividends and do
not take into account sales charges. Actual load-adjusted performance is lower.
This commentary reflects the views of the portfolio management team through the
end of the Fund's period discussed in this report. Of course, the team's views
are subject to change as market and other conditions warrant.
[CAPTION]
"...THE TAX-REFORM SCARE HAS ACTUALLY CREATED AN OPPORTUNITY."
5
<PAGE> 152
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Tax-Free Bond Fund. Total return is a
performance measure that equals the sum of all dividends and capital gains,
assuming reinvestment of these distributions and the change in the price of the
Fund's average net assets. Performance figures included the maximum applicable
sales charge of 4.50% for Class A shares. The effect of the maximum contingent
deferred sales charge for Class B shares (maximum 5% and declining to 0% over
six years) is included in Class B performance. Remember that all figures
represent past performance and are no guarantee of how the Fund will perform in
the future. Also, keep in mind that the total return and share price of the
Fund's investments will fluctuate. As a result, your Fund's shares may be worth
more or less than their original cost, depending on when you sell them.
Note: A portion of the Fund's income may be subject to taxes. Some investors may
be subject to the Alternative Minimum Tax. Capital gains are taxable.
CUMULATIVE TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
<S> <C> <C> <C>
Tax-Free Bond Fund: Class A 14.79% 52.69% 62.00%(1)
Tax-Free Bond Fund: Class B 14.42% N/A 32.24%(2)
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ONE FIVE LIFE OF
YEAR YEARS FUND
---- ----- ----
<S> <C> <C> <C>
Tax-Free Bond Fund: Class A(3) 14.79% 8.84% 8.39%(1)
Tax-Free Bond Fund: Class B(3) 14.42% N/A 7.24%(2)
</TABLE>
YIELDS
- --------------------------------------------------------------------------------
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
SEC 30-DAY
YIELD
-----
<S> <C>
Tax-Free Bond Fund: Class A 5.11%
Tax-Free Bond Fund: Class B 4.61%
</TABLE>
NOTES TO PERFORMANCE
(1) Class A shares started on January 5, 1990.
(2) Class B shares started on December 31, 1991.
(3) The Adviser has agreed to limit the Fund's expenses, including the
management fee (but not including the 12b-1 fee), to 0.70% of the Fund's
average daily net assets. Without the limitation of expenses, the average
annualized total returns for the one-year and five-year periods and since
inception for Class A shares would have been 14.67%, 8.62%, and 8.06%,
respectively. The average annualized total returns for the one-year period
and since inception for Class B shares would have been 14.30% and 7.07%,
respectively.
6
<PAGE> 153
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John Hancock
Tax-Free Bond Fund would be worth on December 31, 1995, assuming you have been
invested since the day each class of shares started and reinvested all
distributions. For comparison, we've shown the same $10,000 investment in the
Lehman Brothers Municipal Bond Index -- an unmanaged index that includes
approximately 15,000 bonds and is commonly used as a measure of bond
performance.
[Tax Free Bond Fund
Class A shares
Line chart with the heading Tax Free Bond Fund: Class A, representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the chart
are three lines.
The first line represents the value of the hypothetical $10,000 investment made
in the Tax Free Bond Fund on January 5, 1990, before sales charge, and is equal
to $16,961 as of December 31, 1995. The second line represents the value of the
Lehman Brothers Municipal Bond Index and is equal to $16,374 as of December 31,
1995. The third line represents the Tax Free Bond Fund after sales charge and is
equal to $16,200 as of December 31, 1995.
Tax Free Bond Fund
Class B shares
Line chart with the heading Tax Free Bond Fund: Class B, representing the growth
of a hypothetical $10,000 investment over the life of the fund. Within the chart
are three lines.
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $13,609 as of December 31, 1995. The second line represents the
value of the hypothetical $10,000 investment made in the Tax Free Bond Fund on
December 31, 1991, before contingent deferred sales charge, and is equal to
$13,524 as of December 31, 1995. The third line represents the Tax Free Bond
Fund after contingent deferred sales charge and is equal to $13,224 as of
December 31, 1995.]
7
<PAGE> 154
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
THE STATEMENT OF ASSETS AND LIABILITIES IS THE FUND'S BALANCE SHEET AND SHOWS
THE VALUE OF WHAT THE FUND OWNS, IS DUE AND OWES ON DECEMBER 31, 1995. YOU'LL
ALSO FIND THE NET ASSET VALUE PER SHARE AS OF THAT DATE.
<TABLE>
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
ASSETS:
Investments at value - Note C:
Tax-exempt long-term bonds
(cost - $190,204,887)....................................... $205,442,483
------------
Receivable for investments sold................................ 12,238,500
Receivable for shares sold..................................... 7,615
Interest receivable............................................ 3,387,852
Receivable from John Hancock Advisers, Inc. -
Note B........................................................ 27,926
Miscellaneous assets........................................... 27,437
------------
Total Assets................................. 221,131,813
------------------------------------------------------------
LIABILITIES:
Temporary overdraft of cash.................................... 3,533,358
Payable for investments purchased.............................. 21,760,596
Payable for shares repurchased................................. 8,787
Dividend payable............................................... 25,227
Payable for variation margin................................... 23,438
Payable to John Hancock Advisers, Inc.
and affiliates - Note B....................................... 108,251
Accounts payable and accrued expenses.......................... 51,085
------------
Total Liabilities............................ 25,510,742
------------------------------------------------------------
NET ASSETS:
Capital paid-in................................................ 195,035,479
Accumulated net realized loss on investments
and financial futures contracts............................... (14,389,504)
Net unrealized appreciation of investments
and financial futures contracts............................... 14,975,096
------------
Net Assets................................... $195,621,071
============================================================
NET ASSET VALUE PER SHARE:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with $0.01 per share par value, respectively)
Class A - $118,797,313/11,137,117.............................. $ 10.67
================================================================================
Class B - $76,823,758/7,202,812................................ $ 10.67
================================================================================
MAXIMUM OFFERING PRICE PER SHARE*
Class A - ($10.67 x 104.71%)................................... $ 11.17
================================================================================
<FN>
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
</TABLE>
THE STATEMENT OF OPERATIONS SUMMARIZES THE FUND'S INVESTMENT INCOME EARNED AND
EXPENSES INCURRED IN OPERATING THE FUND. IT ALSO SHOWS NET GAINS (LOSSES) FOR
THE PERIOD STATED.
<TABLE>
STATEMENT OF OPERATIONS
Year ended December 31, 1995
- --------------------------------------------------------------------------------
<S> <C>
INVESTMENT INCOME:
Interest........................................................ $12,440,385
-----------
Expenses:
Investment management fee - Note B............................. 1,048,120
Distribution/service fee - Note B
Class A...................................................... 175,342
Class B...................................................... 663,054
Transfer agent fee............................................. 209,850
Registration and filing fees................................... 63,679
Custodian fee.................................................. 48,214
Auditing fee................................................... 47,989
Printing....................................................... 46,995
Legal fees..................................................... 30,747
Trustees' fees................................................. 29,411
Miscellaneous.................................................. 26,802
Advisory board fee............................................. 19,730
Less Management Fee Reduction - Note B (208,207)
-----------
Total Expenses................................ 2,201,726
Less Expense Reduction
by John Hancock Advisers,
Inc. - Note B................................. (24,419)
------------------------------------------------------------
Net Expenses.................................. 2,177,307
------------------------------------------------------------
Net Investment Income......................... 10,263,078
------------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FINANCIAL FUTURES CONTRACTS
Net realized loss on investments sold........................... (4,728,195)
Net realized loss on financial futures contracts................ (2,308,339)
Change in net unrealized appreciation/depreciation
of investments................................................. 31,679,568
Change in net unrealized appreciation/depreciation
on financial futures contracts................................. (262,500)
-----------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts................... 24,380,534
------------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations..................... $34,643,612
============================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE> 155
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994
------------ -------------
<S> <C> <C>
INCREASE (DECREASE) IN NET ASSETS:
FROM OPERATIONS:
Net investment income............................................................................... $ 10,263,078 $ 11,284,980
Net realized loss on investments sold and financial futures contracts............................... (7,036,534) (7,349,795)
Change in net unrealized appreciation/depreciation of investments and financial futures contracts... 31,417,068 (25,666,689)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations.................................... 34,643,612 (21,731,504)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income:
Class A - ($0.5699 and $0.5730 per share, respectively)............................................ (6,647,931) (7,588,474)
Class B - ($0.4927 and $0.4973 per share, respectively)............................................ (3,620,138) (3,611,510)
------------ ------------
Total Distributions to Shareholders.............................................................. (10,268,069) (11,199,984)
------------ ------------
FROM FUND SHARE TRANSACTIONS-- NET*................................................................... (13,536,114) 24,808,198
------------ ------------
NET ASSETS:
Beginning of period................................................................................. 184,781,642 192,904,932
------------ ------------
End of period (including undistributed net investment income of $83,180 and $84,996, respectively).. $195,621,071 $184,781,642
============ ============
</TABLE>
* ANALYSIS OF FUND SHARE TRANSACTIONS:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994
------------------------- -------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ---------- ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold...................................................... 990,678 $ 10,001,197 2,973,332 $ 31,232,536
Shares issued to shareholders in reinvestment of distributions... 365,927 3,709,354 430,837 4,303,072
---------- ------------ ---------- ------------
1,356,605 13,710,551 3,404,169 35,535,608
Less shares repurchased.......................................... (2,422,945) (24,445,738) (3,655,146) (36,242,204)
---------- ------------ ---------- ------------
Net decrease..................................................... (1,066,340) $(10,735,187) (250,977) $ (706,596)
========== ============ ========== ============
CLASS B
Shares sold...................................................... 722,057 $ 7,261,875 3,736,809 $ 39,155,237
Shares issued to shareholders in reinvestment of distributions... 202,597 2,054,192 212,691 2,116,235
---------- ------------ ---------- ------------
924,654 9,316,067 3,949,500 41,271,472
Less shares repurchased.......................................... (1,207,168) (12,116,994) (1,608,678) (15,756,678)
---------- ------------ ---------- ------------
Net increase (decrease).......................................... (282,514) $ (2,800,927) 2,340,822 $ 25,514,794
========== ============ ========== ============
</TABLE>
THE STATEMENT OF CHANGES IN NET ASSETS SHOWS HOW THE VALUE OF THE FUND'S NET
ASSETS HAS CHANGED SINCE THE END OF THE PREVIOUS PERIOD. THE DIFFERENCE REFLECTS
EARNINGS LESS EXPENSES, ANY INVESTMENT GAINS AND LOSSES, DISTRIBUTIONS PAID TO
SHAREHOLDERS, AND ANY INCREASE OR DECREASE IN MONEY SHAREHOLDERS INVESTED IN THE
FUND. THE FOOTNOTE ILLUSTRATES THE NUMBER OF FUND SHARES SOLD, REINVESTED AND
REDEEMED DURING THE LAST TWO PERIODS, ALONG WITH THE CORRESPONDING DOLLAR
VALUES.
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE> 156
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout the
period indicated, investment returns, key ratios, and supplemental data are as
follows:
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1995 1994(c) 1993 1992 1991
-------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
CLASS A
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period............................... $ 9.39 $ 10.96 $ 10.47 $ 10.24 $ 9.90
-------- -------- -------- ------- -------
Net Investment Income.............................................. 0.57(b) 0.58 0.62 0.67 0.69
Net Realized and Unrealized Gain (Loss) on Investments............. 1.28 (1.58) 0.93 0.42 0.72
-------- -------- -------- ------- -------
Total from Investment Operations.................................. 1.85 (1.00) 1.55 1.09 1.41
-------- -------- -------- ------- -------
Less Distributions:
Dividends from Net Investment Income............................... (0.57) (0.57) (0.62) (0.68) (0.68)
Distributions from Net Realized Gains on Investments Sold.......... -- -- (0.44) (0.18) (0.39)
-------- -------- -------- ------- -------
Total Distributions............................................... (0.57) (0.57) (1.06) (0.86) (1.07)
-------- -------- -------- ------- -------
Net Asset Value, End of Period..................................... $ 10.67 $ 9.39 $ 10.96 $ 10.47 $ 10.24
======== ======== ======== ======= =======
Total Investment Return at Net Asset Value (d)..................... 20.20% (9.28%) 15.15% 10.97% 14.78%
Total Adjusted Investment Return at Net Asset Value (a)............ 20.08% (9.39%) 14.98% 10.67% 14.40%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted).......................... $118,797 $114,539 $136,521 $99,523 $73,393
Ratio of Expenses to Average Net Assets............................ 0.85% 0.85% 0.78% 0.66% 0.60%
Ratio of Adjusted Expenses to Average Net Assets (a)............... 0.97% 0.96% 0.95% 0.96% 0.98%
Ratio of Net Investment Income to Average Net Assets............... 5.67% 5.72% 5.57% 6.46% 6.86%
Ratio of Adjusted Net Investment Income to Average Net Assets (a).. 5.55% 5.61% 5.40% 6.16% 6.48%
Portfolio Turnover Rate............................................ 113% 107% 116% 79% 123%
</TABLE>
THE FINANCIAL HIGHLIGHTS SUMMARIZES THE IMPACT OF THE FOLLOWING FACTORS ON A
SINGLE SHARE FOR THE PERIOD INDICATED: NET INVESTMENT INCOME, GAINS (LOSSES),
DIVIDENDS AND TOTAL INVESTMENT RETURN OF THE FUND. IT SHOWS HOW THE FUND'S NET
ASSET VALUE FOR A SHARE HAS CHANGED SINCE THE END OF THE PREVIOUS PERIOD.
ADDITIONALLY, IMPORTANT RELATIONSHIPS BETWEEN SOME ITEMS PRESENTED IN THE
FINANCIAL STATEMENTS ARE EXPRESSED IN RATIO FORM.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE> 157
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1995 1994(c) 1993 1992
------- ------- ------- -------
<S> <C> <C> <C> <C>
CLASS B
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period......................................... $ 9.38 $ 10.96 $ 10.47 $ 10.24
------- ------- ------- -------
Net Investment Income........................................................ 0.50(b) 0.50 0.54 0.59(b)
Net Realized and Unrealized Gain (Loss) on Investments....................... 1.28 (1.58) 0.93 0.42
------- ------- ------- -------
Total from Investment Operations............................................ 1.78 (1.08) 1.47 1.01
------- ------- ------- -------
Less Distributions:
Dividends from Net Investment Income......................................... (0.49) (0.50) (0.54) (0.60)
Distributions from Net Realized Gains on Investments Sold.................... -- -- (0.44) (0.18)
------- ------- ------- -------
Total Distributions......................................................... (0.49) (0.50) (0.98) (0.78)
------- ------- ------- -------
Net Asset Value, End of Period............................................... $ 10.67 $ 9.38 $ 10.96 $ 10.47
======= ======= ======= =======
Total Investment Return at Net Asset Value (d)............................... 19.41% (10.05%) 14.30% 10.15%
Total Adjusted Investment Return at Net Asset Value (a)...................... 19.29% (10.16%) 14.13% 9.85%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's omitted).................................... $76,824 $70,243 $56,384 $18,272
Ratio of Expenses to Average Net Assets...................................... 1.60% 1.60% 1.53% 1.43%
Ratio of Adjusted Expenses to Average Net Assets (a)......................... 1.72% 1.71% 1.70% 1.73%
Ratio of Net Investment Income to Average Net Assets......................... 4.90% 4.97% 4.66% 5.57%
Ratio of Adjusted Net Investment Income to Average Net Assets (a)............ 4.78% 4.86% 4.49% 5.27%
Portfolio Turnover Rate...................................................... 113% 107% 116% 79%
</TABLE>
(a) On an unreimbursed basis.
(b) On average month end shares outstanding.
(c) On December 22, 1994, John Hancock Advisers, Inc. became the investment
adviser of the Fund.
(d) Total investment return assumes dividend reinvestment and does not reflect
the effect of sales charges.
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE> 158
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
SCHEDULE OF INVESTMENTS
December 31, 1995
- ---------------------------------------------------------------------------------------------------------------------------
THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY TAX-FREE BOND FUND ON DECEMBER 31, 1995. IT HAS
ONE MAIN CATEGORY: TAX-EXEMPT LONG-TERM BONDS. THE TAX-EXEMPT LONG-TERM BONDS ARE BROKEN DOWN BY STATE. UNDER EACH STATE
IS A LIST OF THE SECURITIES OWNED BY THE FUND.
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
ARIZONA (1.19%)
Arizona Health Facilities Auth,
Hosp Sys Rev Ref Phoenix Memorial Hosp Proj............. 8.200% 06/01/21 BBB $ 2,150 $ 2,328,794 7.57%
-----------
CALIFORNIA (9.20%)
California Statewide Community Development Auth,
Rev Cert of Part Ref Ins'd Hlth Facil Eskaton Inc....... 5.875 05/01/20 A *4,000 4,009,600 5.86
Central Coast Water Auth,
Rev Regional Facil St Wtr Proj.......................... 6.350 10/01/07 AAA *2,000 2,187,680 5.81
Fontana, County of,
Spec Tax of Community Facil Dist No 90-3 Empire Center.. 8.400 04/01/15 B*** 500 478,750 8.77
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A............. Zero 01/01/24 BBB- *675 114,696 6.43
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A............. Zero 01/01/27 BBB- *1,000 140,540 6.43
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A............. Zero 01/01/28 BBB- *7,915 1,044,147 6.43
Toll Rd Rev Fixed Rate Current Int Ser 1995A............ 6.000 01/01/16 BBB- *2,000 2,007,520 5.98
Toll Rd Rev Fixed Rate Current Int Ser 1995A............ 6.500 01/01/32 BBB- *1,950 2,030,906 6.24
Sacramento Municipal Utility District,
Elec Rev Ref Ser A...................................... 6.250 08/15/10 AAA *1,280 1,431,066 5.59
Saddleback Valley United School District,
Spec Tax Community Facil District No. 89-2 Ser A........ 7.750 09/01/16 BBB*** 2,000 2,086,280 7.43
San Jose Financing Auth,
Rev Ser B Community Facil Proj.......................... 5.625 11/15/18 A+ *2,500 2,463,450 5.71
-----------
17,994,635
-----------
COLORADO (5.67%)
Arapahoe County Capital Improvement Trust Fund,
Highway Rev Current Ser E-470........................... 6.950 08/31/20 BAA*** *5,000 5,416,750 6.42
Denver, City and County of,
Airport Sys Rev Ser 1992A............................... 7.250 11/15/25 BBB 2,000 2,204,960 6.58
Airport Sys Rev Ser 1994A............................... 7.500 11/15/23 BBB 3,100 3,464,467 6.71
-----------
11,086,177
-----------
FLORIDA (7.83%)
Jacksonville Electric Auth,
Elec Sys Rev Ser 3-A.................................... 5.250 10/01/28 AA 9,000 8,765,910 5.39
Orange County Health Facilities Auth,
Rev Adventist Hlth Sys Hosp............................. 5.250 11/15/20 AAA *5,000 4,904,400 5.35
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE> 159
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
FLORIDA (CONTINUED)
Tampa Sports Auth,
Sales Tax Rev Tampa Bay Arena Proj...................... 5.750% 10/01/25 AAA $*1,500 $ 1,643,430 5.25%
-----------
15,313,740
-----------
GEORGIA (10.57%)
Georgia Municipal Electric Auth,
Pwr Rev Ser C........................................... 5.700 01/01/19 AAA 5,000 5,291,550 5.39
Pwr Rev Ser EE.......................................... 7.250 01/01/24 AAA 2,000 2,579,880 5.62
Pwr Rev Ser Z........................................... 5.500 01/01/20 AAA 5,840 6,021,741 5.33
Monroe County Development Auth,
Poll Control Rev Ser A Oglethorpe Pwr Corp Scherer Proj. 6.800 01/01/12 A+ 1,000 1,165,240 5.84
Savannah Hospital Auth,
Rev Ref & Imp Candler Hosp Proj......................... 7.000 01/01/23 BBB+ 5,470 5,616,760 6.82
-----------
20,675,171
-----------
ILLINOIS (3.25%)
Chicago, City of,
Skyway Toll Bridge Rev Ref Ser 1994..................... 6.750 01/01/17 BBB- 2,000 2,099,340 6.43
Illinois Development Finance Auth,
Rev Ref Ser A Columbus Cuneo Cabrini Proj............... 8.500 02/01/15 BBB+ 2,150 2,518,639 7.26
Illinois Health Facilities Auth,
Rev Ref Friendship Vlg Schamburg........................ 6.750 12/01/08 A-*** 1,640 1,739,663 6.36
-----------
6,357,642
-----------
INDIANA (3.66%)
Indianapolis Airport Auth,
Spec Facil Rev Ser A United Airlines Proj............... 6.500 11/15/31 BB *7,000 7,156,310 6.36
-----------
LOUISIANA (1.06%)
West Feliciana, Parish of,
Variable Rate Demand Poll Control Rev Ser 1985C
Gulf States Util Co Proj.............................. 7.000 11/01/15 BB+ 2,000 2,076,020 6.74
-----------
MICHIGAN (2.68%)
Michigan State Hospital Finance Auth,
Rev Ref 1990 Ser A Bay Medical Center Hosp.............. 8.250 07/01/12 BAA1*** 2,250 2,449,192 7.58
Williamston Community School District,
GO Ser 1996**........................................... 5.500 05/01/25 AAA *2,725 2,803,807 5.35
-----------
5,252,999
-----------
MISSISSIPPI (4.84%)
Claiborne, County of,
Poll Control Rev Ref Sys Energy Resources Inc........... 7.300 05/01/25 BBB- *4,000 4,186,800 6.97
Washington, County of,
Poll Control Rev Ref Mississippi Pwr & Light Co Proj.... 7.000 04/01/22 BAA3*** 5,000 5,291,800 6.61
-----------
9,478,600
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE> 160
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
NEVADA (5.19%)
Clark, County of,
Ind'l Development Rev Ser A Southwest Gas Corp Proj........ 6.500% 12/01/33 BBB- $ 10,000 $10,160,000 6.40%
-----------
NEW HAMPSHIRE (2.05%)
New Hampshire Higher Educational and Health Facilities Auth,
Hosp Rev Wentworth Douglass Hosp........................... 5.375 01/01/15 AAA 1,300 1,325,675 5.27
New Hampshire Industrial Development Auth,
Rev Ref Poll Control Central Maine Pwr..................... 7.375 05/01/14 BB *2,500 2,680,325 6.88
-----------
4,006,000
-----------
NEW JERSEY (2.97%)
New Jersey Economic Development Auth,
Rev Poll Control General Motors Corp Proj.................. 5.350 04/01/09 A- *1,500 1,488,630 5.39
Rev Ref Ser J Holt Hauling Proj............................ 8.500 11/01/23 BBB*** *2,500 2,574,775 8.25
New Jersey Turnpike Auth,
Ser 1991 C................................................. 6.500 01/01/16 AAA *1,500 1,748,955 5.57
-----------
5,812,360
-----------
NEW YORK (6.98%)
New York State Dormitory Auth,
City Univ Sys Cons Rev Ser 1995A........................... 5.625 07/01/16 BBB *2,000 2,013,340 5.59
New York, City of,
GO Fiscal 1996 Ser F**..................................... 5.750 02/01/19 BBB+ *6,000 5,842,680 5.90
GO Fiscal 1996 Ser G**..................................... 5.750 02/01/20 BBB+ *5,950 5,790,956 5.91
-----------
13,646,976
-----------
NORTH CAROLINA (1.05%)
North Carolina Eastern Municipal Power Agency,
Pwr Sys Rev Ref Ser 1993B.................................. 6.000 01/01/22 A- 2,000 2,064,300 5.81
-----------
OHIO (0.75%)
Student Loan Funding Corp,
Sub Rev Ser B Cincinnati Ohio Student Loan................. 8.875 08/01/08 BBB-*** 1,420 1,461,720 8.62
-----------
OKLAHOMA (1.31%)
Tulsa Municipal Airport Auth,
Rev American Airlines Proj................................. 6.250 06/01/20 BB+ *2,500 2,556,175 6.11
-----------
OREGON (2.56%)
Oregon Health Sciences University,
Ins Rev Cap Apprec 1995 Ser A**............................ Zero 07/01/14 AAA *1,750 656,372 5.37
Ins Rev Cap Apprec 1995 Ser A**............................ Zero 07/01/15 AAA *2,220 786,546 5.39
Ins Rev Cap Apprec 1995 Ser A**............................ Zero 07/01/16 AAA *10,700 3,558,820 5.44
-----------
5,001,738
-----------
PENNSYLVANIA (10.56%)
Allegheny County Industrial Development Auth,
Rev Ref Ser 1994A Environmental Imp USX Corp Proj.......... 6.700 12/01/20 BB+ 5,000 5,201,200 6.44
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE> 161
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
Beaver County Industrial Development Auth,
Poll Control Rev Ref Ser A Ohio Edison Proj................ 7.750% 09/01/24 BB+ $*1,400 $ 1,499,162 7.24%
Keystone Oaks School District,
Variable Rate Ser D........................................ 7.318# 09/01/16 AAA *2,950 3,071,687 7.03
Philadelphia Hospitals and Higher Education Facilities Auth,
Hosp Rev 1991 Ser A Philadelphia Protestant Home Proj...... 8.625 07/01/21 BB*** 2,700 2,848,203 8.18
Hosp Rev 1992 Ser A Childrens Seashore House Proj.......... 7.000 08/15/12 A- 1,250 1,351,437 6.47
Philadelphia, City of,
Wtr & Swr Rev 16th Ser..................................... 7.500 08/01/10 AAA 3,000 3,524,490 6.38
Scranton-Lackawanna Health and Welfare Auth,
Rev Ser A Allied Services Rehabilitation Hosp Proj......... 7.600 07/15/20 BBB-*** 3,000 3,157,650 7.22
-----------
20,653,829
-----------
PUERTO RICO (5.59%)
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico............................................... 6.000# 07/01/11 AAA *200 220,474 5.44
Ref Pars & Inflos Ser 1995 Gtd by the Commonwealth of
Puerto Rico............................................... 8.220# 07/01/11 AAA *5,500 6,620,625 6.83
Puerto Rico, Commonwealth of,
GO Pub Imp Ref Inverse Floater Ser 1992A................... 7.534# 07/01/08 AAA *2,700 3,000,375 6.78
University of Puerto Rico,
Univ Rev Ser M............................................. 5.250 06/01/25 AAA *1,100 1,088,560 5.31
-----------
10,930,034
-----------
SOUTH CAROLINA (3.28%)
Piedmont Municipal Power Agency,
Rev Ref South Carolina Elec Sys............................ 5.375 01/01/25 AAA *6,305 6,421,706 5.28
-----------
TEXAS (9.19%)
Dallas-Fort Worth International Airport Facility
Improvement Corp, Rev American Airlines Inc................ 7.250 11/01/30 BB+ 10,250 11,083,735 6.70
Ector County Hospital District,
Hosp Rev 1992.............................................. 7.300 04/15/12 A- 4,000 4,393,800 6.65
El Paso International Airport,
Rev Ref Spec Facil Marriott Corp Proj...................... 7.750 03/01/12 B 1,410 1,456,192 7.50
Harris County Industrial Development Corp,
Marine Term & Wtr Poll Control Ref GATX Terminals Corp
Proj....................................................... 6.625 02/01/24 BBB+ 1,000 1,046,800 6.33
-----------
17,980,527
-----------
UTAH (0.54%)
Carbon, County of,
Solid Waste Disposal Rev Ref Ser A East Carbon
Development Corp.......................................... 9.000 07/01/12 BBB-*** 1,000 1,068,190 8.43
-----------
VIRGINIA (2.52%)
Pittsylvania County Industrial Development Auth,
Rev Ser A Exempt Facil..................................... 7.550 01/01/19 BB*** 4,500 4,923,810 6.90
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE> 162
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C>
WASHINGTON (0.53%)
Port of Walla Walla Public Corp,
Solid Waste Recycling Rev Ser 1995 Ponderosa Fibres Proj... 9.125% 01/01/26 BB-*** $ *1,000 $ 1,035,030 8.82%
------------
TOTAL TAX EXEMPT LONG-TERM BONDS
(Cost $190,204,887) (105.02%) $205,442,483
========= ============
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
* Securities other than short-term investments, newly added to the portfolio,
during the period ended December 31, 1995.
** These securities having an aggregate value of $19,439,181 or 9.94% of the
Fund's net asset value, have been purchased as forward commitments that is,
the Fund has agreed on the trade date, to take delivery of and make payment
for such securities on a delayed basis subsequent to the date of this
schedule. The purchase price and interest rate of such securities is fixed
at trade date, although the Fund does not earn any interest on such
securities until settlement date. The Fund has instructed its Custodian
Bank to segregate assets with the current value at least equal to the
amount of its forward commitment. Accordingly, the market values of
$5,082,809 of Savannah Hospital Auth, Rev Ref & Imp Candler Hosp Proj,
7.000%, 01-01-20, $1,136,036 of El Paso International Airport, Rev Ref Spec
Facil Marriot Corp Proj, 7.750%, 03-01-12, $1,904,958 of Georgia Municipal
Electric Auth, Pwr Rev Ser C, 5.700%, 01-01-19, $8,751,300 of Jacksonville
Electric Auth, Elec Sys Rev 3-A, 5.250%, 10-01-28, and $3,773,899 of
Georgia Municipal Electric Auth, Pwr Rev Ser Z, 5.500%, 01-01-20, has been
segregated to cover the forward commitments.
*** Credit Ratings are rated by Moody's Investors Services, Fitch or John
Hancock Advisers, Inc. where Standard & Poor's ratings are not available.
**** Credit ratings are unaudited.
+ The yield is not calculated in accordance with guidelines established by
the U.S. Securities Exchange Commission and is unaudited. Zero coupon
yields are at yield to maturity.
# Represents rate in effect on December 31, 1995.
The percentages shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE> 163
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
PORTFOLIO CONCENTRATION
- --------------------------------------------------------------------------------
THE TAX-FREE BOND FUND INVESTS PRIMARILY IN SECURITIES ISSUED BY THE VARIOUS
STATES AND THEIR VARIOUS POLITICAL SUBDIVISIONS. THE PERFORMANCE OF THE FUND IS
CLOSELY TIED TO ECONOMIC CONDITIONS WITHIN THE APPLICABLE STATES AND THE
FINANCIAL CONDITION OF THE STATES AND THEIR AGENCIES AND MUNICIPALITIES. THE
CONCENTRATION OF INVESTMENTS BY STATES AND CREDIT RATINGS FOR INDIVIDUAL
SECURITIES HELD BY THE FUND ARE SHOWN IN THE SCHEDULE OF INVESTMENTS. IN
ADDITION, THE CONCENTRATION OF INVESTMENTS CAN BE AGGREGATED BY VARIOUS SECTOR
CATEGORIES.
<TABLE>
<CAPTION>
MARKET VALUE AS A PERCENTAGE OF
SECTOR DISTRIBUTION THE FUND'S NET ASSETS:
- ------------------- ----------------------
<S> <C>
General Obligation............................. 11.14%
Revenue Bonds - Certificate of Participation... 2.89
Revenue Bonds - Education...................... 8.96
Revenue Bonds - Electric Power................. 17.97
Revenue Bonds - Health......................... 17.91
Revenue Bonds - Housing........................ --
Revenue Bonds - Industrial Development Bond.... 5.95
Revenue Bonds - Other.......................... 1.78
Revenue Bonds - Pollution Control Facilities... 9.94
Revenue Bonds - Transportation................. 20.99
Revenue Bonds - Water & Sewer.................. 7.49
------
TOTAL TAX-EXEMPT LONG-TERM BONDS 105.02%
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE> 164
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock Tax-Free Bond Fund (the "Fund") is a diversified open-end
investment management company registered under the Investment Company Act of
1940.
The investment objective of the Fund is to obtain as high a level of interest
income exempt from federal income taxes as is consistent with preservation of
capital by investing primarily in municipal bonds, notes and commercial paper,
the interest on which is exempt from federal income taxes.
The Trustees have authorized the issuance of two classes of the Fund,
designated as Class A and Class B. The shares of each class represent an
interest in the same portfolio of investments of the Fund and have equal rights
to voting, redemption, dividends and liquidation, except that certain expenses,
subject to the approval of the Trustees, may be applied differently to each
class of shares in accordance with current regulations of the Securities and
Exchange Commission. Shareholders of a class which bears distribution/service
expenses under the terms of a distribution plan, have exclusive voting rights
regarding such distribution plan. Class A shares are subject to an initial sales
charge of up to 4.50% and a 12b-1 distribution plan. Prior to May 15, 1995, the
maximum sales charge was 4.75%. Class B shares are subject to a contingent
deferred sales charge and a separate 12b-1 distribution plan. Significant
accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or, at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly-owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement. Aggregate cash balances are
invested in one or more repurchase agreements, whose underlying securities are
obligations of the U.S. government and/or its agencies. The Fund's custodian
bank receives delivery of the underlying securities for the joint account on the
Fund's behalf. The Adviser is responsible for ensuring that the agreement is
fully collateralized at all times.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investment, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $12,505,428 of capital
loss carryforwards available, to the extent provided by regulations, to offset
future net realized capital gains. If such carryforwards are used by the Fund,
no capital gain distributions will be made. The carryforwards expire as follows:
December 31, 2002 -- $7,349,795, December 31, 2003 -- $5,155,633. Expired
capital loss carryforwards are reclassified to capital paid-in, in the year of
expiration.
DIVIDENDS, DISTRIBUTIONS, AND INTEREST Interest income on investment securities
is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment income
and realized gains on the ex-dividend date. Such distributions are determined in
conformity with income tax regulations, which may differ from generally accepted
accounting principles. Dividends paid by the Fund with respect to each class of
shares will be calculated in the same manner, at the same time and will be in
the same amount, except for the effect of expenses that may be applied
differently to each class as explained previously.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are determined at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes.
Distribution/service fees, if any, are calculated daily at the class level based
on the appropriate
18
<PAGE> 165
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
net assets of each class and the specific expense rate(s) applicable of each
class.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates and
other market conditions. At the time the Fund enters into a financial futures
contract, it is required to deposit with its custodian a specified amount of
cash or U.S. government securities, known as "initial margin", equal to a
certain percentage of the value of the financial futures contract being traded.
Each day, the futures contract is valued at the official settlement price of the
board of trade or U.S. commodities exchange. Subsequent payments, known as
"variation margin", to and from the broker are made on a daily basis as the
market price of the financial futures contract fluctuates. Daily variation
margin adjustments, arising from this "mark to market", are recorded by the Fund
as unrealized gains or losses.
When the contracts are closed, the Fund recognizes a gain or loss. Risks of
entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contract may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening, or realizing the benefits of closing
out, futures positions because of position limits or limits on daily price
fluctuations imposed by an exchange.
For federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures transactions.
At December 31, 1995, open positions in financial futures contracts were as
follows:
<TABLE>
<CAPTION>
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- -------------- -------- ------------
<S> <C> <C> <C>
MARCH 1996 75 MUNI BOND INDEX SHORT ($262,500)
=========
</TABLE>
At December 31, 1995, the Fund has deposited in a segregated account $895,000
par value of Clark County, Nevada Industrial Development Revenue Bond, 6.50%,
12/01/33 to cover margin requirements on open financial futures contracts.
PREMIUM AND DISCOUNT For tax-exempt issues, the Fund amortizes the amount paid
in excess of par value on securities purchased from either the date of purchase
or date of issue to date of sale, maturity or to next call date, if applicable.
The Fund accretes original issue discount from par value on securities purchased
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code. The Fund records market
discount on bonds purchased after April 30, 1993 at the time of disposition.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS WITH
AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program at an annual
rate of 0.55% of the Fund's average daily net asset value.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive state
limit where the Fund is registered to sell shares, the fee payable to the
Adviser will be reduced to the extent of such excess, and the Adviser will make
additional arrangements necessary to eliminate any remaining excess expenses.
The current limits are 2.5% of the first $30,000,000 of the Fund's average daily
net asset value, 2.0% of the next $70,000,000, and 1.5% of the remaining average
daily net asset value.
The Adviser has agreed to limit Fund expenses, including the management fee
(but not including the 12b-1 fee), to 0.70% of the Fund's average daily net
assets. Accordingly, the reduction in the Adviser's fee amounted to $208,207 for
the period ended December 31, 1995. This reduction may be discontinued at any
time. Furthermore, $24,419 of custodian fees have been reduced by balance
credits applied during the period ended December 31, 1995.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly-owned subsidiary of the Adviser. For the period ended December
31, 1995, JH Funds received net sales charges
19
<PAGE> 166
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
on sales of Class A shares of the Fund in the amount of $158,248. Out of this
amount, $14,871 was retained and used for printing prospectuses, advertising,
sales literature and other purposes, $68,756 was paid as sales commissions and
service fees to unrelated broker-dealers and $74,621 was paid as sales
commissions and service fees to sales personnel of John Hancock Distributors,
Inc. ("Distributors"), Tucker Anthony, Incorporated ("Tucker Anthony") and Sutro
& Co., Inc. ("Sutro"), all of which are broker-dealers. The Adviser's indirect
parent, John Hancock Mutual Life Insurance Company, is the indirect sole
shareholder of Distributors and John Hancock Freedom Securities Corporation and
its subsidiaries, which include Tucker Anthony and Sutro.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value at the time of
redemption or the original purchase cost of the shares being redeemed. Proceeds
from CDSC are paid to JH Funds and are used in whole or in part to defray its
expenses related to providing distribution related services to the Fund in
connection with the sale of Class B shares. For the period ended December 31,
1995, contingent deferred sales charges received by JH Funds amounted to
$222,466.
In addition, to reimburse JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Accordingly, the Fund will make payments to JH
Funds for distribution and service expenses at an annual rate not to exceed
0.15% of Class A average daily net assets and 0.90% of Class B average daily net
assets to reimburse JH Funds for its distribution and service costs. Up to a
maximum of 0.15% of these payments may be service fees as defined by the amended
Rules of Fair Practice of the National Association of Securities Dealers. Under
the amended Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1
payments could occur under certain circumstances.
The Board of Trustees approved a shareholder servicing agreement between the
Fund and John Hancock Investor Services Corporation ("Investor Services"), a
wholly-owned subsidiary of The Berkeley Financial Group, for the period between
December 22, 1994 and May 12, 1995, inclusive under which Investor Services
processed telephone transactions on behalf of the Fund. For the period May 15,
1995 through September 30, 1995, the Fund entered into a full service transfer
agent agreement with Investor Services whereby Class A and Class B shares paid
transfer agent fees based on the number of shareholder accounts and certain
out-of-pocket expenses. Prior to May 15, 1995 The Shareholder Services Group was
the transfer agent. Effective October 1, 1995 transfer agent expense is a fund
expense.
Messrs. Edward J. Boudreau, Jr. and Richard S. Scipione are directors and/or
officers of the Adviser, and/or its affiliates as well as Trustees of the Fund.
The compensation of unaffiliated Trustees is borne by the Fund.
Effective with the fees paid for 1995, the unaffiliated Trustees may elect to
defer for tax purposes their receipt of this compensation under the John Hancock
Group of Funds Deferred Compensation Plan. The Fund makes investments into other
John Hancock funds, as applicable, to cover its liability with regard to the
deferred compensation. Investments to cover the Fund's deferred compensation
liability are recorded on the Fund's books as an other asset. The deferred
compensation liability is marked to market on a periodic basis and income earned
by the investment is recorded on the Fund's books.
The Fund has an independent advisory board composed of certain members of the
former Transamerica Board of Trustees who provide advice to the current Trustees
in order to facilitate a smooth management transition. The Fund pays the
advisory board and its counsel a fee.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the period
ended December 31, 1995, aggregated $211,980,373 and $211,965,175, respectively.
There were no purchases or sales of long-term obligations of the U.S. government
and its agencies during the period ended December 31, 1995.
20
<PAGE> 167
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Free Bond Fund
The cost of investments owned at December 31, 1995 for Federal income tax
purposes was $190,204,887. Gross unrealized appreciation and depreciation of
investments aggregated $15,264,006 and $26,410, respectively, resulting in net
unrealized appreciation of $15,237,596.
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended December 31, 1995, the Fund has reclassified $80,005 from
undistributed net investment income and $63,964 from accumulated net realized
loss on investments and financial futures contracts to capital paid-in. This
represents the cumulative amounts necessary to report these balances on a tax
basis, excluding certain temporary differences, as of December 31, 1995.
Additional adjustments may be needed in subsequent reporting periods. These
reclassifications, which have no impact on the net asset value of the Fund, are
primarily attributable to certain differences in the computation of
distributable income and capital gains under federal tax rules versus generally
accepted accounting principles.
PLAN OF REORGANIZATION
On November 28, 1995, the Board of Trustees of the Fund approved a plan of
reorganization between the Fund and the John Hancock Tax-Exempt Income Fund
("Income Fund") providing for the transfer of substantially all of the assets
and liabilities of the Income Fund to the Fund in exchange solely for Class A
and Class B shares of the Fund to be distributed to Income Fund's Class A and
Class B shareholders, respectively.
21
<PAGE> 168
John Hancock Funds - Tax-Free Bond Fund
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Board of Trustees and Shareholders of
John Hancock Tax-Free Bond Fund
We have audited the accompanying statement of assets and liabilities, including
the schedule of investments, of the John Hancock Tax-Free Bond (the "Fund"), as
of December 31, 1995, and the related statement of operations for the year then
ended, the statement of changes in net assets for each of the two years in the
period then ended, and the financial highlights for each of the periods
indicated therein. These financial statements and financial highlights are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and financial highlights based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian and brokers, or other
appropriate auditing procedures when replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of the
John Hancock Tax-Free Bond Fund at December 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the indicated periods, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
---------------------
Ernst & Young LLP
Boston, Massachusetts
January 31, 1996
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is furnished with
respect to the distributions of the Fund for its fiscal year ended December 31,
1995.
For specific information on exemption provisions in your state, consult your
local state tax office or your tax adviser.
Income dividends are 98.8% tax-exempt. Approximately 20% of the 1995 income
dividends are subject to the alternative minimum tax. None of the income was
derived from U.S. Treasury obligations, or qualify for the corporate dividends
received deductions.
22
<PAGE> 169
NOTES
John Hancock Funds - Tax-Free Bond Fund
23
<PAGE> 170
[LOGO] JOHN HANCOCK FUNDS Bulk Rate
A GLOBAL INVESTMENT MANAGEMENT FIRM U.S. Postage
101 Huntington Avenue Boston, MA 02199-7603 PAID
Brockton, MA
Permit No. 582
[A 1/2" x 1/2" John Hancock Funds logo in upper left hand corner of the page. A
box sectioned in quadrants with a triangle in upper left, a circle in upper
right, a cube in lower left and a diamond in lower right. A tag line below reads
"A Global Investment Management Firm."]
- --------------------------------------------------------------------------------
This report is for the information of shareholders of the John Hancock
Tax-Free Bond Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[A recycled logo in lower left hand corner with caption "Printed on Recycled
Paper."]
<PAGE> 171
JOHN HANCOCK
TAX-EXEMPT INCOME FUND
CLASS A AND CLASS B SHARES
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1995
This Statement of Additional Information provides information about John
Hancock Tax-Exempt Income Fund (the "Fund") in addition to the information that
is contained in the Fund's Class A and Class B Prospectus (the "Prospectus"),
dated May 1, 1995.
This Statement of Additional Information is not a prospectus. It should
be read in conjunction with the Fund's Prospectus, a copy of which can be
obtained free of charge by writing or telephoning:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
1-800-225-5291
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Statement of
Additional
Information
Page
<S> <C>
ORGANIZATION OF THE FUND 2
INVESTMENT OBJECTIVE AND POLICIES 2
CERTAIN INVESTMENT PRACTICES 5
INVESTMENT RESTRICTIONS 9
THOSE RESPONSIBLE FOR MANAGEMENT 13
INVESTMENT ADVISORY AND OTHER SERVICES 20
DISTRIBUTION CONTRACT 22
NET ASSET VALUE 24
INITIAL SALES CHARGE ON CLASS A SHARES 24
DEFERRED SALES CHARGE ON CLASS B SHARES 26
SPECIAL REDEMPTIONS 26
ADDITIONAL SERVICES AND PROGRAMS 27
DESCRIPTION OF THE FUND'S SHARES 28
TAX STATUS 29
CALCULATION OF PERFORMANCE 32
BROKERAGE ALLOCATION 34
TRANSFER AGENT SERVICES 36
CUSTODY OF PORTFOLIO 36
INDEPENDENT AUDITORS 36
APPENDIX A 37
FINANCIAL STATEMENTS
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ORGANIZATION OF THE FUND
John Hancock Tax-Exempt Income Fund (the "Fund") is a diversified,
open-end management investment company organized in 1976 by John Hancock
Advisers, Inc. (the "Adviser") as a Massachusetts business trust under the laws
of The Commonwealth of Massachusetts. The Adviser is an indirect wholly-owned
subsidiary of John Hancock Mutual Life Insurance Company (the "Life Insurance
Company"), a Massachusetts life insurance company chartered in 1862, with
national headquarters at John Hancock Place, Boston, Massachusetts. Prior to May
1, 1991, the Fund was known as "John Hancock Tax-Exempt Income Trust."
INVESTMENT OBJECTIVE AND POLICIES
The investment objective of the Fund is to provide its shareholders
with as high a level of dividend income exempt from Federal income tax as is
consistent with preservation of capital and the Fund's requirements for
liquidity. The Fund will seek to achieve its objective by investing in a
diversified portfolio of municipal bonds and other securities (including
certain industrial development or private activity bonds), the interest on
which is, at
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the time of issue, excludable from gross income for Federal income tax purposes
in the opinion of bond counsel to the issuer (all of which are commonly known as
"Tax-Exempt Bonds"). The type of securities the Fund invests in are described in
the Prospectus.
Subsequent to its purchase by the Fund, an issue of Tax-Exempt Bonds
may cease to be rated or its rating may be reduced below the minimum required
for purchase by the Fund. Neither event will require the elimination of the
issue from the Fund's portfolio, but the change may affect the Fund's ability to
buy additional Tax-Exempt Bonds within categories restricted by the limitations
referred to in the Prospectus and will be analyzed by the Fund in determining
whether it should continue to hold the issue. If at any time the nature of the
ratings utilized by Moody's Investors Service Inc. ("Moody's"), Standard &
Poor's Ratings Group ("Standard and Poor's") or Fitch Investors Services, Inc.
("Fitch") should no longer be comparable to the description of ratings included
in Appendix A to the Prospectus, the Fund will attempt to use ratings comparable
to those described in Appendix A as standards for making investments in
Tax-Exempt Bonds in accordance with its investment objective.
Securities will be purchased and sold principally in response to the
Fund's current evaluation of an issuer's ability to meet its debt obligations in
the future and the Fund's current assessment of future changes in the levels of
interest rates on Tax-Exempt Bonds of varying maturities. In some instances, the
sale of a portfolio security could result in a capital loss to the Fund.
When-Issued Securities. Newly issued Tax-Exempt Bonds may be purchased by the
Fund on a "when-issued" basis, which means that the bonds are not delivered
until a future date that may be as many as 45 days after the Fund has agreed to
purchase the Bonds. Until delivery, the Fund does not pay for Tax-Exempt Bonds
purchased on a "when-issued" basis and does not start earning interest on them,
but the Fund is committed to pay for the Bonds on a fixed date at a fixed price.
During the period before the delivery of the Bonds, the Fund could have
unrealized gains or losses if the Bonds' market value increased or decreased
relative to the agreed-upon purchase price. The Fund does not intend to make
when-issued commitments for speculative purposes but only to accomplish the
investment objective of the Fund as set forth above. On the date the Fund enters
into an agreement to purchase Tax-Exempt Bonds on a when-issued basis, the Fund
segregates in a separate account cash or liquid high grade debt securities equal
in value to the when-issued commitment. These assets will be valued daily at
market, and additional cash or securities will be segregated in a separate
account to the extent that the total value of the assets in the account declines
below the amount of the when-issued commitment.
In general, Tax-Exempt Bonds are debt obligations issued by states,
territories and possessions of the United States, the District of Columbia and
their political subdivisions, agencies and instrumentalities.
Tax-Exempt Bonds are issued to obtain funds for various public
purposes, including the construction of bridges, highways, housing, hospitals,
mass transportation, schools, streets, and water and sewer works. Other public
purposes for which Tax-Exempt Bonds may be issued include the refunding of
outstanding obligations, obtaining funds for general operating expenses,
obtaining funds to loan to other public institutions and facilities and in
anticipation of the receipt of revenue or the issuance of other obligations. In
addition, the term Tax-Exempt Bonds includes certain types of private activity
bonds, including industrial development bonds, issued by public authorities to
obtain funds to provide privately-operated housing facilities, sports
facilities, convention or trade show facilities, airport, mass transit, port or
parking facilities, air or water pollution control facilities and certain
facilities for water supply, gas, electricity or sewage or solid waste disposal.
Other types of industrial development bonds, the proceeds of which are used for
the acquisition, construction, reconstruction, or improvement of or to provide
equipment for privately-operated industrial or commercial facilities, may
qualify as Tax-Exempt Bonds, although current Federal tax laws place substantial
limitations on the size of such issues. Federal tax legislation enacted in the
1980's placed substantial new restrictions on the issuance of the bonds
described above and in some cases eliminated the ability of state or local
governments to issue Tax-Exempt Bonds for some of the above purposes. Such
restrictions do not affect the Federal income tax treatment of Tax-Exempt Bonds
in which the Fund may invest which were issued prior to the effective dates of
the provisions imposing such restrictions. The effect of these restrictions may
be to reduce the volume of newly issued Tax-Exempt Bonds.
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Obligations of issuers of Tax-Exempt Bonds are subject to the
provisions of bankruptcy, insolvency and other laws affecting the rights and
remedies of creditors, such as the Federal Bankruptcy Act, and laws, if any,
which may be enacted by Congress or state legislatures extending the time for
payment of principal or interest, or both, or imposing other constraints upon
enforcement of such obligations. There is also the possibility that as a result
of litigation or other conditions the power or ability of any one or more
issuers to pay when due, principal of and interest on, their Tax-Exempt Bonds,
may be affected.
Tax-Exempt Bonds may be either "general obligation" bonds or "revenue"
bonds. General obligation bonds are secured by the issuer's pledge of its faith,
credit and taxing power for the payment of principal and interest. The taxes or
special assessments that can be levied for the payment of debt service may be
limited or unlimited as to rate or amount. Revenue bonds are payable only from
the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise or other specific revenue
source. Private Activity bonds which are Tax-Exempt Bonds are in most cases
revenue bonds and do not generally constitute the pledge of the credit or taxing
power of the issuer of such bonds. The credit quality of such Tax-Exempt Bonds
is usually directly related to the credit standing of the user of the
facilities. Private activity bonds may be backed by bank letters of credit or by
guarantees of banks or other institutions, which may be called upon by the
holders of the underlying obligations in the event of the issuer's default.
There are three major classes of short-term Tax-Exempt debt
instruments. The names used to designate these loans are "bond anticipation
notes," "tax anticipation notes," and "revenue anticipation notes". Bond
anticipation notes are issued as interim debt instruments in anticipation of
funding through longer term bond financing. Tax anticipation notes are issued
against and are repayable from tax collections. Revenue anticipation notes are
issued against and repayable from the receipt of a specific future revenue or
are general obligations of the issuer.
The yields on Tax-Exempt Bonds are dependent on a variety of factors,
including general money market conditions, supply and demand, general conditions
of the Tax-Exempt Bond market, the size of a particular offering, the maturity
of the obligation and the rating of the issuer. The ratings of Moody's, Standard
and Poor's and Fitch represent their opinions as to the quality of the
Tax-Exempt Bonds which they undertake to rate. It should be emphasized, however,
that such ratings are general and are not absolute standards of quality.
Consequently, Tax-Exempt Bonds with the same maturity, coupon and rating may
have different yields when purchased in the open market, while Tax-Exempt Bonds
of the same maturity and coupon with different ratings may have the same yield.
Generally, however, higher quality Tax-Exempt Bonds produce lower
yields, but are more readily marketable. To protect shareholders' capital under
adverse market conditions, the Fund from time to time may deem it prudent to
purchase higher quality Tax-Exempt Bonds or taxable short-term investments with
a resultant decrease in yield or increase in the proportion of dividend income
taxable to shareholders.
From time to time, proposals have been introduced before Congress which
would further restrict the issuance of Tax-Exempt Bonds or adversely affect the
Federal income tax consequences of holding such bonds. Similar proposals may be
introduced in the future. It is not possible to determine the effect on the
availability of Tax-Exempt Bonds for investment by the Fund, the value of the
Fund's portfolio if such proposals were enacted, or the Federal income tax
consequences to the Fund's shareholders.
The Internal Revenue Code affects the excludable nature of interest on
"private activity bonds" and industrial development bonds received by
"substantial users" of facilities financed by such bonds or by "related persons"
of such substantial users. Any person who is such a substantial user or related
person should consult his own tax adviser before purchasing shares of the Fund.
While the investment objective of the Fund is to earn a high level of
Tax-Exempt interest income, the Fund may temporarily hold cash or invest a
portion of its assets in short-term taxable investments, the interest on which
is subject to Federal income tax. Short-term taxable investments include
securities such as: (1) U.S. Treasury notes, bills, and bonds; (2) obligations
of agencies and instrumentalities of the United States government; and (3) money
market instruments, such as domestic bank certificates of deposit, finance
<PAGE> 174
company and other corporate commercial paper, repurchase agreements and bankers'
acceptances. Occasions for acquiring short-term taxable investments may arise as
a result of market conditions adverse to investments in Tax-Exempt Bonds or
delays in investing the proceeds of sales of Fund shares or sales of portfolio
securities. In addition, the Fund may acquire short-term taxable investments to
be in a position to meet cash requirements for Fund expenses or for the
redemption of shares by Fund shareholders, and thus avoid the necessity of
liquidating long-term portfolio investments. It is not expected that the portion
of the Fund's total assets consisting of short-term taxable investments will
exceed 15%.
CERTAIN INVESTMENT PRACTICES
Repurchase Agreements. A repurchase agreement is a contract under which the Fund
would acquire a security for a relatively short period (usually not more than 7
days) subject to the obligation of the seller to repurchase and the Fund to
resell such security at a fixed time and price (representing the Fund's cost
plus interest). The Fund will enter into repurchase agreements only with member
banks of the Federal Reserve System and with "primary dealers" in U.S.
Government securities. The Adviser will continuously monitor the
creditworthiness of the parties with whom the Fund enters into repurchase
agreements. The Fund has established a procedure providing that the securities
serving as collateral for each repurchase agreement must be delivered to the
Fund's custodian either physically or in book-entry form and that the collateral
must be marked to market daily to ensure that each repurchase agreement is fully
collateralized at all times. In the event of bankruptcy or other default by a
seller of a repurchase agreement, the Fund could experience delays in
liquidating the underlying securities and could experience losses, including the
possible decline in the value of the underlying securities during the period
while the Fund seeks to enforce its rights thereto, possible subnormal levels of
income and lack of access to income during this period, and expense of enforcing
its rights.
Municipal Lease Obligations. A municipal lease is an obligation in the form of a
lease or installment purchase which is issued by a state or local government to
acquire equipment and facilities. Income from such obligations is generally
exempt from state and local taxes in the state of issuance. Municipal leases
frequently involve special risks not normally associated with general obligation
or revenue bonds. Leases and installment purchase or conditional sale contracts
(which normally provide for title to the leased asset to pass eventually to the
governmental issuer) have evolved as a means for governmental issuers to acquire
property and equipment without meeting the constitutional and statutory
requirements for the issuance of debt. The debt issuance limitations are deemed
to be inapplicable because of the inclusion in many leases or contracts of
"non-appropriation" clauses that relieve the governmental issuer of any
obligation to make future payments under the lease or contract unless funds are
appropriated for such purpose by the appropriate legislative body on a yearly or
other periodic basis. In addition, such leases or contracts may be subject to
the temporary abatement of payments in the event the issuer is prevented from
maintaining occupancy of the leased premises or utilizing the leased equipment.
Although the obligations may be secured by the leased equipment or facilities,
the disposition of the property in the event of non appropriation or foreclosure
might prove difficult, time consuming and costly, and result in an
unsatisfactory or delayed repayment of the Fund's original investment.
Certain municipal lease obligations may be deemed illiquid for the
purpose of the Fund's 15% limitation on investments in illiquid securities.
Other municipal lease obligations acquired by the Fund may be determined by the
Adviser, pursuant to guidelines adopted by the Trustees of the Fund, to be
liquid securities for the purpose of such limitation. In determining the
liquidity of municipal lease obligations, the Adviser will consider a variety of
factors including: (1) the willingness of dealers to bid for the security; (2)
the number of dealers willing to purchase or sell the obligation and the number
of other potential buyers; (3) the frequency of trades or quotes for the
obligation; and (4) the nature of marketplace trades. In addition, the Adviser
will consider factors unique to particular lease obligations affecting the
marketability thereof. These include the general creditworthiness of the issuer,
the importance to the issuer of the property covered by the lease and the
likelihood that the marketability of the obligation will be maintained
throughout the time the obligation is held by the Fund.
Financial Futures Contracts. The Fund may hedge its portfolio by selling
financial futures contracts to offset the effect of expected increases in
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interest rates and by purchasing such futures contracts as an offset against the
effect of expected declines in interest rates. Although other techniques could
be used to reduce the Fund's exposure to interest rate fluctuations, the Fund
may be able to hedge its exposure more effectively and perhaps at a lower cost
by using financial futures contracts. The Fund may enter into financial futures
contracts for hedging and speculative purposes to the extent permitted by
regulations of the Commodity Futures Trading Commission ("CFTC").
In general, the sale of a financial futures contract creates an
obligation of the Fund, as seller, to deliver the specific type of instrument
called for in the contract or the cash value of a securities index at a
specified future time in exchange for receipt of a specified price. The purchase
of a financial futures contract creates an obligation of the Fund, as purchaser,
to take delivery of the specific type of instrument or the cash value of a
securities index at a specified future time in exchange for payment of a
specified price.
Financial futures contracts have been designed by boards of trade which
have been designated "contract markets" by the CFTC. Futures contracts are
traded on these markets in a manner that is similar to the way a stock is traded
on a stock exchange. The boards of trade, through their clearing corporations,
guarantee that the contracts will be performed. Currently, financial futures
contracts are based on interest rate instruments such as long-term U.S. Treasury
bonds, U.S. Treasury notes, Government National Mortgage Association ("GNMA")
modified pass-through mortgage-backed securities, three-month U.S. Treasury
bills, 90-day commercial paper, bank certificates of deposit and Eurodollar
certificates of deposit and The Municipal Bond Buyer Index. It is expected that
if other financial futures contracts are developed and traded the Fund may
engage in transactions in such contracts.
Although some financial futures contracts by their terms call for
actual delivery or acceptance of financial instruments, in most cases the
contracts are closed out prior to delivery by offsetting purchases or sales of
matching financial futures contracts (same exchange, underlying security and
delivery month). Other financial futures contracts, such as futures contracts on
securities indices, by their terms call for cash settlements. If the offsetting
purchase price is less than the Fund's original sale price, the Fund realizes a
gain, or if it is more, the Fund realizes a loss. Conversely, if the offsetting
sale price is more than the Fund's original purchase price, the Fund realizes a
gain, or if it is less, the Fund realizes a loss. The transaction costs must
also be included in these calculations. The Fund will pay a commission in
connection with each purchase or sale of financial futures contracts, including
a closing out transaction. For a discussion of the Federal income tax
considerations of trading in financial futures contracts, see the information
under the caption "Tax Status" below.
At the time the Fund enters into a financial futures contract, it is
required to deposit with its custodian a specified amount of cash or U.S.
government securities, known as "initial margin," ranging upward from 1.1% of
the value of the financial futures contract being traded. The margin required
for a financial futures contract is set by the board of trade or exchange on
which the contract is traded and may be modified during the term of the
contract. The initial margin is in the nature of a performance bond or good
faith deposit on the financial futures contract which is returned to the Fund
upon termination of the contract, assuming all contractual obligations have been
satisfied. The Fund expects to earn interest income on its initial margin
deposits. Each day, the futures contract is valued at the official settlement
price of the board of trade or exchange on which it is traded. Subsequent
payments, known as "variation margin," to and from the broker are made on a
daily basis as the market price of the financial futures contract fluctuates.
This process is known as "mark to market." Variation margin does not represent a
borrowing or lending by the Fund but is instead settlement between the Fund and
the broker of the amount one would owe the other if the financial futures
contract expired. In computing net asset value, the Fund will mark to market its
open financial futures positions.
Successful hedging depends on a strong correlation between the market
for the underlying securities and the futures contract market for those
securities. There are several factors that will probably prevent this
correlation from being a perfect one, and even a correct forecast of general
interest rate trends may not result in a successful hedging transaction. There
are significant differences between the securities and futures markets which
could create an imperfect correlation between the markets and which could affect
the success of a given hedge. The degree of imperfection of correlation depends
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on circumstances such as: variations in speculative market demand for financial
futures and debt securities, including technical influences in futures trading
and differences between the financial instruments being hedged and the
instruments underlying the standard financial futures contracts available for
trading in such respects as interest rate levels, maturities, and
creditworthiness of issuers. The degree of imperfection may be increased where
the underlying debt securities are lower-rated and, thus, subject to greater
fluctuation in price than higher-rated securities.
A decision as to whether, when and how to hedge involves the exercise
of skill and judgment, and even a well-conceived hedge may be unsuccessful to
some degree because of market behavior or unexpected interest rate trends. The
Fund will bear the risk that the price of the securities being hedged will not
move in complete correlation with the price of the futures contracts used as a
hedging instrument. Although the Adviser believes that the use of financial
futures contracts will benefit the Fund, an incorrect prediction could result in
a loss on both the hedged securities in the Fund's portfolio and the hedging
vehicle so that the Fund's return might have been better had hedging not been
attempted. However, in the absence of the ability to hedge, the Adviser might
have taken portfolio actions in anticipation of the same market movements with
similar investment results but, presumably, at greater transaction costs. The
low margin deposits required for futures transactions permit an extremely high
degree of leverage. A relatively small movement in a futures contract may result
in losses or gains in excess of the amount invested.
Futures exchanges may limit the amount of fluctuation permitted in
certain futures contract prices during a single trading day. The daily limit
establishes the maximum amount the price of a futures contract may vary either
up or down from the previous day's settlement price at the end of the current
trading session. Once the daily limit has been reached in a futures contract
subject to the limit, no more trades may be made on that day at a price beyond
that limit. The daily limit governs only price movements during a particular
trading day and, therefore, does not limit potential losses because the limit
may work to prevent the liquidation of unfavorable positions. For example,
futures prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of positions and subjecting some holders of futures contracts to
substantial losses.
Finally, although the Fund engages in financial futures transactions
only on boards of trade or exchanges where there appears to be an adequate
secondary market, there is no assurance that a liquid market will exist for a
particular futures contract at any given time. The liquidity of the market
depends on participants closing out contracts rather than making or taking
delivery. In the event participants decide to make or take delivery, liquidity
in the market could be reduced. In addition, the Fund could be prevented from
executing a buy or sell order at a specified price or closing out a position due
to limits on open positions or daily price fluctuation limits imposed by the
exchanges or boards of trade. If the Fund cannot close out a position, it will
be required to continue to meet margin requirements until the position is
closed.
Options on Financial Futures Contracts. The Fund may purchase and write
call and put options on financial futures contracts. An option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in a futures contract at a specified exercise price at any
time during the period of the option. Upon exercise, the writer of the option
delivers the futures contract to the holder at the exercise price. The Fund
would be required to deposit with its custodian initial and variation margin
with respect to put and call options on futures contracts written by it. Options
on futures contracts involve risks similar to the risks relating to transactions
in financial futures contracts. Also, an option purchased by the Fund may expire
worthless, in which case the Fund would lose the premium paid for that option.
Other Considerations. The Fund will engage in futures transactions for bona fide
hedging or speculative purposes to the extent permitted by CFTC regulations. The
Fund will determine that the price fluctuations in the futures contracts and
options on futures used for hedging purposes are substantially related to price
fluctuations in securities held by the Fund or which it expects to purchase.
Except as stated below, the Fund's futures transactions will be entered into for
traditional hedging purposes -- i.e., futures contracts will be sold to protect
against a decline in the price of securities that the Fund owns, or futures
contracts will be purchased to protect the Fund against an increase in the price
of securities it intends to purchase. As evidence of this hedging intent, the
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Fund expects that on 75% or more of the occasions on which it takes a long
futures or option position (involving the purchase of futures contracts), the
Fund will have purchased, or will be in the process of purchasing, equivalent
amounts of related securities in the cash market at the time when the futures
or, option position is closed out. However, in particular cases, when it is
economically advantageous for a Fund to do so, a long futures position may be
terminated or an option may expire without the corresponding purchase of
securities.
As an alternative to literal compliance with the bona fide hedging
definition, a CFTC regulation permits the Fund to elect to comply with a
different test, under which the aggregate initial margin and premiums required
to establish speculative positions in futures contracts and options on futures
will not exceed 5% of the net asset value of the Fund's portfolio, after taking
into account unrealized profits and losses on any such positions and excluding
the amount by which such options were in-the-money at the time of purchase. The
Fund will engage in transactions in futures contracts only to the extent such
transactions are consistent with the requirements of the Internal Revenue Code
for maintaining its qualification as a regulated investment company for Federal
income tax purposes.
The Fund's investment objective and the investment policies and
practices described above are not fundamental (except where noted) and may be
changed by the Trustees without shareholder approval.
When the fund purchases a financial futures contract, or writes a put
option or purchases a call option thereon, cash and high grade liquid debt
securities will be deposited in a segregated account with the Fund's custodian
in an amount that together with the amount of initial and variation margin held
in the account of its broker, equals the market value of the futures contract.
INVESTMENT RESTRICTIONS
Fundamental Investment Restrictions:
The following investment restrictions will not be changed without approval of a
majority of outstanding voting securities which, as used in the Prospectus and
the Statement of Additional Information, means approval of the lesser of (1) the
holders of 67% or more of the shares represented at a meeting if the holders of
more than 50% of the outstanding shares are present in person or by proxy or (2)
the holders of more than 50% of the outstanding shares.
The Fund observes the following fundamental investment restrictions.
The Fund may not:
(1) Issue senior securities, except as permitted by paragraphs (2) and (7)
below. For purposes of this restriction, the issuance of shares of
beneficial interest in multiple classes or series, the purchase or sale
of options, futures contracts and options on futures contracts, forward
commitments, and repurchase agreements entered into in accordance with
the Fund's investment policies, and the pledge, mortgage or
hypothecation of the Fund's assets within the meaning of paragraph (3)
below are not deemed to be senior securities.
(2) Borrow money, except from banks as a temporary measure where such
borrowings would not exceed 5% of the market value of the Fund's total
assets at the time each such borrowing is made.
(3) Pledge, mortgage, or hypothecate its assets, except to secure
indebtedness permitted by paragraph (2) above and then only if such
pledging, mortgaging or hypothecating does not exceed 10% of the Fund's
total assets taken at cost.
(4) Act as an underwriter, except to the extent that, in connection with
the disposition of portfolio investments, the Fund may be deemed to be
an underwriter for purposes of the Securities Act of 1933. The Fund may
also participate as part of a group in bidding for the purchase of
Tax-Exempt Bonds directly from an issuer in order to take advantage of
the lower purchase price available to members of such groups.
(5) Purchase real estate or any interest therein, but this restriction
shall not prevent the Fund from investing in Tax-Exempt Bonds secured
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by real estate or interests therein.
(6) Make loans, except that the Fund (1) may lend portfolio securities in
accordance with the Fund's investment policies in an amount up to 33
1/3% of the Fund's total assets taken at market value, (2) enter into
repurchase agreements, and (3) purchase all or a portion of an issue of
debt securities, bank loan participation interests, bank certificates
of deposit, bankers' acceptances, debentures or other securities,
whether or not the purchase is made upon the original issuance of the
securities.
(7) Purchase or sell commodities or commodity contracts or puts, calls or
combinations of both, except options on securities, securities indices,
currency and other financial instruments, futures contracts on
securities, securities indices, currency and other financial
instruments and options on such futures contracts, forward commitments,
interest rate swaps, caps and floors, securities index put or call
warrants and repurchase agreements entered into in accordance with the
Fund's investment policies.
(8) Purchase any security (other than securities issued or guaranteed by
the U.S. Government, its agencies or instrumentalities and repurchase
agreements collateralized by such securities) if, as a result: (a) more
than 5% of its total assets would be invested in the securities of any
one issuer, or (b) the Fund would own more than 10% of the voting
securities of any one issuer. For purposes of this paragraph 8, each
governmental unit (state, county, city, for example) and each
subdivision, agency or instrumentality thereof and each multi-member
agency of which any of them is a member shall be considered a separate
issuer.
(9) Purchase securities of an issuer conducting its principal activity in
any particular industry if immediately after such purchase the value of
the Fund's investments in all issuers in this industry would exceed 25%
of its total assets taken at market value. (Tax-Exempt Bonds and
securities issued or guaranteed by the United States government and its
agencies and instrumentalities are not subject to this limitation.)
(10) Purchase securities other than Tax-Exempt Bonds and short-term taxable
investments, as those terms are defined in this Statement of Additional
Information.
Non fundamental Investment Restrictions
The following restrictions are designated as non fundamental and may be
changed by the Trustees without shareholder approval.
The Fund may not:
(a) Participate on a joint-and-several basis in any securities trading
account. The "bunching" of orders for the sale or purchase of
marketable portfolio securities with other accounts under the
management of the Adviser to save commissions or to average prices
among them and the participation of the Fund as a part of a group
bidding for the purchase of Tax-Exempt Bonds as permitted by
fundamental investment restriction No. 4 are not deemed to result in a
securities trading account.
(b) Purchase securities on margin or make short sales unless by virtue of
its ownership of other securities, the Fund has the right to obtain
securities equivalent in kind and amount to the securities sold and, if
the right is conditional, the sale is made upon the same conditions,
except that the Fund may obtain such short-term credits as may be
necessary for the clearance of purchases and sales of securities.
(c) Purchase a security if, as a result, (i) more than 10% of the Fund's
total assets would be invested in securities of closed-end investment
companies, (ii) such purchase would result in more than 3% of the total
outstanding voting securities of any one such closed-end investment
company being held by the Fund, or (iii) more than 5% of the Fund's
total assets would be invested in any one such closed-end investment
company. The Fund will not purchase the securities of any open-end
investment company, except in a merger, consolidation or other
reorganization.
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(d) Purchase securities of any issuer which, together with any predecessor,
has a record of less than three years' continuous operations prior to
the purchase if such purchase would cause investments of the Fund in
all such issuers to exceed 5% of the value of the total assets of the
Fund. (This limitation does not apply to securities that are issued or
guaranteed by the United States government and its agencies or
instrumentalities or that are secured by the pledge of the faith,
credit and taxing power of any entity authorized to issue Tax-Exempt
Bonds.)
(e) Invest for the purpose of exercising control over or management of any
company.
(f) Purchase warrants of any issuer, if, as a result of such purchases,
more than 2% of the value of the Fund's total assets would be invested
in warrants which are not listed on the New York Stock Exchange or the
American Stock Exchange or more than 5% of the value of the total
assets of the Fund would be invested in warrants generally, whether or
not so listed. For these purposes, warrants are to be valued at the
lesser of cost or market, but warrants acquired by the Fund in units
with or attached to debt securities shall be deemed to be without
value.
(g) Knowingly purchase or retain securities of an issuer if one or more of
the Trustees or officers of the Fund or directors or officers of the
Adviser or any investment management subsidiary of the Adviser
individually owns beneficially more than 0.5%, and together own
beneficially more than 5%, of the securities of such issuer.
(h) Purchase or sell interests in real estate limited partnerships or in
oil, gas or other mineral leases or exploration or development
programs; however, this policy will not prohibit the acquisition of
securities of companies engaged in the production or transmission of
oil, gas or other minerals.
(i) Write, purchase or sell puts, calls or combinations thereof except in
accordance with its investment objective and policies. The Fund will
not purchase or write options on equity securities.
(j) Knowingly purchase any security that is subject to legal or contractual
delays in or restrictions on resale.
(k) Notwithstanding any investment restriction to the contrary, the Fund
may, in connection with the John Hancock Group of Funds Deferred
Compensation Plan for Independent Trustees/Directors, purchase
securities of other investment companies within the John Hancock Group
of Funds provided that, as a result, (i) no more than 10% of the Fund's
assets would be invested in securities of all other investment
companies, (ii) such purchase would not result in more than 3% of the
total outstanding voting securities of any one such investment company
being held by the Fund and (iii) no more than 5% of the Fund's assets
would be invested in any one such investment company.
In order to permit the sale of shares of the Fund in certain states,
the Trustees may, in their sole discretion, adopt restrictions on investment
policy more restrictive than those described above. Should the Trustees
determine that any such restrictive policy is no longer in the best interest of
the Fund and its shareholders, the Fund may cease offering shares in the state
involved and the Trustees may revoke such restrictive policy. Moreover, if the
states involved shall no longer require any such restrictive policy, the
Trustees may, at their sole discretion, revoke such policy.
If a percentage restriction on investment or utilization of assets as
set forth above is adhered to at the time an investment is made, a later change
in percentage resulting from changes in the values or the total costs of the
Fund's assets will not be considered a violation of the restriction.
THOSE RESPONSIBLE FOR MANAGEMENT
<PAGE> 180
The business of the Fund is managed by its Trustees, who elect officers
who are responsible for the day-to-day operations of the Fund and who execute
policies formulated by the Trustees. Several of the officers and Trustees of the
Fund are also officers and directors of the Adviser or officers and directors of
the Fund's principal distributor, John Hancock Funds, Inc. ("John Hancock
Funds).
<PAGE> 181
The following table sets forth the principal occupation or employment
of the Trustees and principal officers of the Fund during the past five years:
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE FUND DURING THE PAST FIVE YEARS
- ----------------- -------------- --------------------------
<S> <C> <C>
<F1>Edward J. Boudreau, Jr. Chairman <F2><F3> Chairman and Chief Executive Officer, the
101 Huntington Avenue Adviser and The Berkeley Financial Group
Boston, Massachusetts ("The Berkeley Group"); Chairman, NM Capital
Management, Inc. ("NM Capital"); John Hancock
Advisers International Limited; ("Advisers
International"); John Hancock Funds, Inc.,
("John Hancock Funds"); John Hancock Investor
Services Corporation ("Investor Services")
and Sovereign Asset Management Corporation
("SAMCorp"); (herein after the Adviser, the
Berkeley Group, NM Capital, Advisers
International, John Hancock Funds, Investor
Services and SAMCorp are collectively
referred to as the "Affiliated Companies");
Chairman, First Signature Bank & Trust;
Director, John Hancock Freedom Securities
Corp., John Hancock Capital Corp., New
England/Canada Business Council; Member,
Investment Company Institute Board of
Governors; Director, Asia Strategic Growth
Fund, Inc.; Trustee, Museum of Science;
President, the Adviser (until July 1992).
Chairman, John Hancock Distributors, Inc.
(until April, 1994).
- --------------
<FN>
<F1>An "interested person" of the Fund, as such term is defined in the Investment
Company Act of 1940, as amended (the "Investment Company Act:).
<F2>A Member of the Executive Committee.
<F3>A Member of Investment Committee of the Adviser.
<F4>An Alternate Member of the Executive Committee.
<F5>A Member of the Audit and Administration Committees.
</TABLE>
<PAGE> 182
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE FUND DURING THE PAST FIVE YEARS
- ----------------- -------------- --------------------------
<S> <C> <C>
Dennis S. Aronowitz Trustee<F5> Professor of Law, Boston University School
Boston University of Law; Trustee, Brookline Savings Bank;
Boston, Massachusetts Director, Boston University Center for
Banking Law Studies (until 1990).
Richard P. Chapman, Jr. Trustee<F5> President, Brookline Savings Bank.
160 Washington Street
Brookline, Massachusetts
William J. Cosgrove Trustee<F5> Vice President, Senior Banker and Senior
20 Buttonwood Place Credit Officer, Citibank, N.A. (retired
Saddle River, New Jersey September 1991); Executive Vice President,
Citadel Group Representative, Inc.
Gail D. Fosler Trustee<F5> Vice President and Chief Economist, The
4104 Woodbine Street Conference Board (non-profit economic and
Chevy Chase, MD business research).
Bayard Henry Trustee<F5> Corporate Advisor; Director, Fiduciary Trust
121 High Street Company (a trust company); Director,
Boston, Massachusetts Groundwater Technology, Inc. (remediation);
Samuel Cabot, Inc.; Advisor, Corning Capital
Corp.
- -------------------
<FN>
<F1>An "interested person" of the Fund, as such term is defined in the Investment Company Act of 1940, as
amended (the "Investment Company Act").
<F2>A Member of the Executive Committee.
<F3>A Member of Investment Committee of the Adviser.
<F4>An Alternate Member of the Executive Committee.
<F5>A Member of the Audit and Administration Committees.
</TABLE>
<PAGE> 183
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE FUND DURING THE PAST FIVE YEARS
- ----------------- -------------- --------------------------
<S> <C> <C>
<F1>Richard S. Scipione Trustee<F4> General Counsel, the Life Insurance Company;
John Hancock Place Director, the Adviser, the Affiliated
P.O. Box 111 Companies, John Hancock Distributors, Inc., JH
Boston, Massachusetts Networking Insurance Agency, Inc., John
Hancock Subsidiaries, Inc., SAMCorp, NM
Capital and John Hancock Property and Casualty
Insurance and its affiliates (until November,
1993); Trustee; The Berkeley Group; Director,
John Hancock Home Mortgages Corp. and John
Hancock Financial Access, Inc. (until July
1990).
Edward J. Spellman Trustee<F5> Partner, KPMG Peat Marwick (retired June 1990).
259C Commercial Bld.
Suite 200
Lauderdale by the Sea, FL
<F1>Robert G. Freedman Vice Chairman and Chief Vice Chairman and Chief Investment Officer,
101 Huntington Avenue Investment Officer<F3> the Adviser; President, the Adviser (until
Boston, Massachusetts December 1994).
<F1>Anne C. Hodsdon President<F3> President and Chief Operations Officer, the
101 Huntington Avenue Adviser; Executive Vice President, the Adviser
Boston, Massachusetts (until December 1994).
<F1>Thomas H. Drohan Senior Vice President and Senior Vice President and Secretary, the
101 Huntington Avenue Secretary Adviser.
Boston, Massachusetts
<F1>James K. Ho Senior Vice President<F3> Senior Vice President, the Adviser.
101 Huntington Avenue
Boston, Massachusetts
- ------------------
<FN>
<F1>An "interested person" of the Fund, as such term is defined in the Investment Company Act.
<F2>A Member of the Executive Committee.
<F3>A Member of Investment Committee of the Adviser.
<F4>An Alternate Member of the Executive Committee.
<F5>A Member of the Audit and Administration Committees.
</TABLE>
<PAGE> 184
<TABLE>
<CAPTION>
POSITIONS HELD PRINCIPAL OCCUPATION(S)
NAME AND ADDRESS WITH THE FUND DURING THE PAST FIVE YEARS
- ----------------- -------------- --------------------------
<S> <C> <C>
<F1>James B. Little Senior Vice President and Senior Vice President the Adviser.
101 Huntington Avenue Chief Financial Officer<F3>
Boston, Massachusetts
<F1>Michael P. DiCarlo Senior Vice President<F3> Senior Vice President, the Adviser.
101 Huntington Avenue
Boston, Massachusetts
<F1>John A. Morin Vice President Vice President, the Adviser.
101 Huntington Avenue
Boston, Massachusetts
<F1>Susan S. Newton Vice President, Assistant Vice President and Assistant Secretary,
101 Huntington Avenue Secretary and Compliance the Adviser.
Boston, Massachusetts Officer
<F1>James J. Stokowski Vice President and Treasurer Vice President, the Adviser.
101 Huntington Avenue
Boston, Massachusetts
<F1>Andrew F. St. Pierre Senior Vice President<F3> Senior Vice President, the Adviser;
101 Huntington Avenue President, John Hancock Closed-End Funds;
Boston, Massachusetts Portfolio Manager, Harvard Management
Corp. (until October, 1991).
- ------------------
<FN>
<F1>An "interested person" of the Fund, as such term is defined in the Investment Company Act.
<F2>A Member of the Executive Committee.
<F3>A Member of Investment Committee of the Adviser.
<F4>An Alternate Member of the Executive Committee.
<F5>A Member of the Audit and Administration Committees.
</TABLE>
<PAGE> 185
As of the date of this Statement of Additional Information, the
officers and Trustees of the Fund as a group owned less than 1% of the
outstanding shares of the Fund and to the knowledge of the registrant, no
persons owned of record or beneficially 5% or more of any class of registrant's
outstanding securities.
All of the officers listed are officers or employees of the Adviser or
affiliated companies. Some of the directors and officers may also be officers
and/or directors or trustees of one or more of the other funds for which the
Adviser serves as investment adviser.
The following table provides information regarding the compensation
paid by the Fund and the other investment companies in the John Hancock Fund
Complex to the Independent Trustees for their services for each Fund's 1994
fiscal year. The two non-Independent Trustees, Messrs. Boudreau and Scipione,
and each of the officers of the Funds are interested persons of the Adviser, are
compensated by the Adviser and receive no compensation from the Fund for their
services.
<TABLE>
<CAPTION>
TOTAL COMPENSATION
FROM THE FUND AND
PENSION OR JOHN HANCOCK FUND
AGGREGATE RETIREMENT BENEFITS ESTIMATED ANNUAL COMPLEX TO
COMPENSATION FROM ACCRUED AS PART OF BENEFITS UPON (TOTAL OF 18 FUNDS)
INDEPENDENT TRUSTEES THE FUND THE FUND'S EXPENSES RETIREMENT TRUSTEES<F1>
<S> <C> <C> <C> <C>
Dennis S. Aronowitz $ 7,950 - - $ 60,950
Richard P. Chapman, Jr. 8,216 - - 62,950
William J. Cosgrove 7,950 - - 60,950
Gail D. Fosler 7,950 - - 60,950
Bayard Henry 8,216 - - 62,950
Edward J. Spellman 7,950 - - 60,950
------- ----------- ----------- --------
$48,232 $369,700
<FN>
<F1>The total compensation paid by the John Hancock Fund Complex to the
Independent Trustees is as of the calendar year ended December 31, 1994.
</TABLE>
INVESTMENT ADVISORY AND OTHER SERVICES
As described in the Prospectus, the Fund receives its investment advice
from the Adviser. Investors should refer to the Prospectus for a description of
certain information concerning the investment management contract. Each of the
Trustees and principal officers of the Fund who is also an affiliated person of
the Adviser is named above, together with the capacity in which such person is
affiliated with the Fund and the Adviser.
As described in the Fund's Prospectus under the caption "Organization
and Management of the Fund," the Fund has entered into an investment management
contract with the Adviser. Under the investment management contract the Adviser
provides the Fund with (i) a continuous investment program, consistent with the
Fund's stated investment objective and policies (ii) supervision of all aspects
of the Fund's operations except those that are delegated to a custodian,
transfer agent or other agent and (iii) such executive administrative and
clerical personnel, officers and equipment as are necessary for the conduct of
its business. The Adviser is responsible for the management of the Fund's
portfolio assets.
<PAGE> 186
Securities held by the Fund may also be held by other funds or
investment advisory clients for which the Adviser or its affiliates provide
investment advice. Because of different investment objectives or other factors,
a particular security may be bought for one or more funds or clients when one or
more other funds or clients are selling the same security. If opportunities for
purchase or sale of securities by the Adviser for the Fund or for other funds or
clients for which the Adviser renders investment advice arise for consideration
at or about the same time, transactions in such securities will be made, insofar
as feasible, for the respective funds or clients in a manner deemed equitable to
all of them. To the extent that transactions on behalf of more than one client
of the Adviser or its affiliates may increase the demand for securities being
purchased or the supply of securities being sold, there may be an adverse effect
on price.
No person other than the Adviser and its directors and employees
regularly furnishes advice to the Fund with respect to the desirability of the
Fund's investing in, purchasing or selling securities. The Adviser may from time
to time receive statistical or other similar factual information, and
information regarding general economic factors and trends, from the Life
Insurance Company and its affiliates.
Under the terms of the investment management contract with the Fund,
the Adviser provides the Fund with office space, supplies and other facilities
required for the business of the Fund. The Adviser pays the compensation of all
other officers and employees of the Fund, and pays the expenses of clerical
services relating to the administration of the Fund.
All expenses which are not specifically paid by the Adviser and which
are incurred in the operation of the Fund (including fees of Trustees of the
Fund who are not "interested persons", as such term is defined in the Investment
Company Act, but excluding certain distribution related activities required to
be paid by the Adviser or John Hancock Funds) and the continuous public offering
of the shares of the Fund are borne by the Fund. Class expenses properly
allocable to either Class A shares or Class B shares will be borne exclusively
by such class of shares, subject to conditions set forth in a private letter
ruling that the Trust has received from the Internal Revenue Service relating to
its multiple-class structure.
As discussed in the Prospectus and as provided by the investment
management contract, the Fund pays the Adviser monthly an investment management
fee, which is accrued daily, based on a stated percentage of the average of the
daily net assets of the Fund as follows:
<TABLE>
Net Asset Value Annual Rate
--------------- -----------
<S> <C>
First $500,000,000 0.55%
Next $500,000,000 0.50%
Amount over $1,000,000,000 0.45%
</TABLE>
From time to time, the Adviser may reduce its fee or make other
arrangements to limit the Fund's expenses to a specified percentage of average
daily net assets. The Adviser retains the right to re-impose a fee and recover
any other payments to the extent that, at the end of any fiscal year, the Fund's
annual expenses fall below this limit.
On December 31, 1994, the net assets of the Fund were $471,488,790. For
the years ended December 31, 1992, 1993 and 1994, the Adviser received fees of
$2,179,523, $2,460,892 and $2,763,233 respectively. The 1992 and 1993 advisory
fee figures reflects the different advisory fee schedule that was in effect
before January 3, 1994.
If the total of all ordinary business expenses of the Fund for any
fiscal year exceeds limitations prescribed in any state in which shares of the
Fund are qualified for sale, the fee payable to the Adviser will be reduced to
the extent required by these limitations. At this time, the most restrictive
limits on expenses applicable to the Fund imposed by a state require that
expenses charged to the Fund in any fiscal year not exceed 2 1/2% of the first
$30,000,000 of the Fund's average net asset value, 2% of the next $70,000,000 of
such assets and 1 1/2% of the remaining average net asset value. When
calculating the above limit, the Fund may exclude interest, brokerage
<PAGE> 187
commissions and extraordinary expenses.
Pursuant to its investment management contract, the Adviser is not
liable to the Fund or its shareholders for any error of judgment or mistake of
law or for any loss suffered by the Fund in connection with the matters to which
the investment management contract relates, except a loss resulting from willful
misfeasance, bad faith or gross negligence on the part of the Adviser in the
performance of its duties or from reckless disregard by the Adviser of its
obligations and duties under the investment management contract.
The Adviser, located at 101 Huntington Avenue, Boston, Massachusetts
02199-7603, was organized in 1968 and presently has more than $13 billion in
assets under management in its capacity as investment adviser to the Fund and
the other mutual funds and publicly traded investment companies in the John
Hancock group of funds having a combined total of over 1,060,000 shareholders.
The Adviser is an affiliate of the Life Insurance Company, one of the most
recognized and respected financial institutions in the nation. With total assets
under management of $80 billion, the Life Insurance Company is one of the ten
largest life insurance companies in the United States, and carries Standard &
Poor's and A.M. Best's highest ratings. Founded in 1862, the Life Insurance
Company has been serving clients for over 130 years.
Under the investment management contract, the Fund may use the name
"John Hancock" or any name derived from or similar to it only for so long as the
contract or any extension, renewal or amendment thereof remains in effect. If
the contract is no longer in effect, the Fund (to the extent that it lawfully
can) will cease to use such a name or any other name indicating that it is
advised by or otherwise connected with the Adviser. In addition, the Adviser or
the Life Insurance Company may grant the non-exclusive right to use the name
"John Hancock" or any similar name to any other corporation or entity, including
but not limited to any investment company of which the Life Insurance Company or
any subsidiary or affiliate thereof or any successor to the business of any
subsidiary or affiliate thereof shall be the investment adviser.
The investment management contract and the distribution contract
discussed below continue in effect from year to year if approved annually by
vote of a majority of the Fund's Trustees who are not interested persons of one
of the parties to the contract, cast in person at a meeting called for the
purpose of voting on such approval, and by either the Fund's Trustees or the
holders of a majority of the Fund's outstanding voting securities. The contract
automatically terminates upon assignment. The contract may be terminated without
penalty on 60 days' notice at the option of either party to the contract or by
vote of a majority of the outstanding voting securities of the Fund.
DISTRIBUTION CONTRACT
The Fund has a distribution contract with John Hancock Funds. Under the
contract, John Hancock Funds is obligated to use its best efforts to sell shares
on behalf of the Fund. Shares of the Fund are also sold by selected
broker-dealers (the "Selling Brokers") which have entered into selling agency
agreements with John Hancock. John Hancock accepts orders for the purchase of
the shares of the Fund which are continually offered at net asset value next
determined plus applicable sales charge. In connection with the sale of Class A
and Class B shares, John Hancock Funds and Selling Brokers receive compensation
in the form of a sales charge imposed, in the case of Class A shares, at the
time of sale or, in the case of Class B shares, on a deferred basis. The sales
charges are discussed further in the Fund's Class A and Class B Prospectus.
The Fund's Trustees adopted Distribution Plans with respect to Class A
and Class B shares pursuant to Rule 12b-1 under the Investment Company Act.
Under the Class A and Class B Plans, the Fund will pay distribution and service
fees at an aggregate annual rate of up to 0.30% and 1.00%, respectively, of the
Fund's average daily net assets. However, the amount of the service fee will not
exceed 0.25% of the Fund's average daily net assets attributable to each class
of shares. The distribution fees reimburse John Hancock Funds for its
distribution costs incurred in the promotion of sales of shares of the Fund, and
the service fees compensate Selling Brokers for providing personal and account
maintenance services to shareholders. In the event that John Hancock Funds is
not fully reimbursed for expenses incurred by it under the Class B Plan in any
fiscal year, John Hancock Funds may carry these expenses forward, provided
<PAGE> 188
however, that the Trustees may terminate the Class B Plan and thus the Fund's
obligation to make further payments at any time. Accordingly, the Fund does not
treat unreimbursed expenses relating to the Class B shares as a liability of the
Fund. The Plans were approved by a majority of the voting securities of the
applicable class of the Fund. The Plans with all amendments were approved by a
majority of the Trustees, including a majority of the Trustees who are not
interested persons of the Fund and who have no direct or indirect financial
interest in the operation of the Plans (the "Independent Trustees"), by votes
cast in person at meetings called for the purpose of voting on such Plans.
Pursuant to the Plans, at least quarterly, John Hancock Funds provides
the Fund with a written report of the amounts expended under the Plans and the
purpose for which expenditures were made. The Trustees review these reports on a
quarterly basis.
During the fiscal year ended December 31, 1994 the Funds paid Investor
Services the following amounts of expenses with respect to the Class A shares
and Class B shares of each of the Funds:
<TABLE>
<CAPTION>
Expense Items
Printing and
Mailing of Interest Carrying
Prospectus to New Compensation to Expenses of John or Other Finance
Tax Exempt Advertising Shareholders Selling Brokers Hancock Funds Charges Other
<S> <C> <C> <C> <C> <C>
Class A Shares $63,743 $25,047 $1,165,602 $247,947 $ 0
Class B Shares 482 159 17,602 1,850 282
</TABLE>
Each of the Plans provides that it will continue in effect only so long
as its continuance is approved at least annually by a majority of both the
Trustees and the Independent Trustees. Each of the Plans provides that it may be
terminated without penalty (a) by vote of a majority of the Independent
Trustees, (b) by a majority of the Fund's outstanding shares of the applicable
class upon 60 days' written notice to John Hancock Funds, and (c) automatically
in the event of assignment. Each of the Plans further provides that it may not
be amended to increase the maximum amount of the fees for the services described
therein without the approval of a majority of the outstanding shares of the
class of the Fund which has voting rights with respect to the Plans. And
finally, each of the Plans provides that no material amendment to the Plan will,
in any event, be effective unless it is approved by a vote of the Trustees and
the Independent Trustees. In adopting the Plan, the Trustees concluded that, in
their judgment, there is a reasonable likelihood that each Plan will benefit the
holders of the applicable class of shares of the Fund.
When the Fund seeks an Independent Trustee to fill a vacancy or as a
nominee for election by shareholders, the selection or nomination of the
Independent Trustee is, under resolutions adopted by the Trustees
contemporaneously with their adoption of the Plans, committed to the discretion
of the Committee on Administration of the Trustees. The members of the Committee
on Administration are all Independent Trustees and are identified in this
Statement of Additional Information under the heading "Those Responsible for
Management."
NET ASSET VALUE
For purposes of calculating the net asset value ("NAV") of a Fund's
shares, the following procedures are utilized wherever applicable. Debt
investment securities are valued on the basis of valuations furnished by a
principal market maker or a pricing service, both of which generally utilize
electronic data processing techniques to determine valuations for normal
institutional size trading units of debt securities without exclusive reliance
upon quoted prices.
Short-term debt investments which have a remaining maturity of 60 days
or less are generally valued at amortized cost which approximates market value.
If market quotations are not readily available or if in the opinion of the
<PAGE> 189
Adviser any quotation or price is not representative of true market value, the
fair value of the security may be determined in good faith in accordance with
procedures approved by the Trustees.
A Fund will not price its securities on the following national
holidays: New Year's Day; Presidents' Day; Good Friday; Memorial Day;
Independence Day; Labor Day; Thanksgiving Day; and Christmas Day.
INITIAL SALES CHARGE ON CLASS A SHARES
The sales charges applicable to purchases of Class A shares of the Fund
are described in the Fund's Class A and Class B Prospectus. Methods of obtaining
reduced sales charges referred to generally in the Prospectus are described in
detail below. In calculating the sales charge applicable to current purchases of
Class A shares, the investor is entitled to cumulate current purchases with the
greater of the current value (at offering price) of the Class A shares of the
Fund, or if Investor Services is notified by the investor's dealer or the
investor at the time of the purchase, the cost of the Class A shares owned.
Combined Purchases. In calculating the sales charge applicable to purchases of
Class A shares made at one time, the purchases will be combined if made by (a)
an individual, his spouse and their children under the age of 21, purchasing
securities for his or their own account, (b) a trustee or other fiduciary
purchasing for a single trust, estate or fiduciary account and (c) certain
groups of four or more individuals making use of salary deductions or similar
group methods of payment whose funds are combined for the purchase of mutual
fund shares. Further information about combined purchases, including certain
restrictions on combined group purchases, is available from Investor Services or
a selling Broker's representative.
Without Sales Charge. As described in the Class A and Class B Prospectus, Class
A shares of the Fund may be sold without a sales charge to certain persons
described in the Prospectus.
Accumulation Privilege. Investors (including investors combining purchases) who
are already Class A shareholders may also obtain the benefit of the reduced
sales charge by taking into account not only the amount then being invested but
also the purchase price or value of the Class A shares already held by such
person.
Combination Privilege. Reduced sales charges (according to the schedule set
forth in the Class A and Class B Prospectus) also are available to an investor
based on the aggregate amount of his concurrent and prior investments in Class A
shares of the Fund and shares of all other John Hancock funds which carry a
sales charge.
Letter of Intention. Reduced sales charges are also applicable to investments
made over a specified period pursuant to a Letter of Intention (the "LOI"),
which should be read carefully prior to its execution by an investor. Such an
investment (including accumulation and combinations) must aggregate $100,000 or
more invested during a period of thirteen months from the date of the LOI or
from a date within ninety days prior thereto, upon written request to Investor
Services. The sales charge applicable to all amounts invested under the LOI is
computed as if the aggregate amount intended to be invested had been invested
immediately. If such aggregate amount is not actually invested, the difference
in the sales charge actually paid and the sales charge payable had the LOI not
been in effect is due from the investor. However, for the purchases actually
made within the thirteen-month period the sales charge applicable will not be
higher than that which would have applied (including accumulations and
combinations) had the LOI been for the amount actually invested.
The LOI authorizes Investor Services to hold in escrow sufficient Class
A shares (approximately 5% of the aggregate) to make up any difference in sales
charges on the amount intended to be invested and the amount actually invested,
until such investment is completed within the thirteen-month period, at which
time the escrow shares will be released. If the total investment specified in
the LOI is not completed, the Class A shares held in escrow may be redeemed and
the proceeds used as required to pay such sales charge as may be due. By signing
the LOI, the investor authorizes Investor Services to act as his
attorney-in-fact to redeem any escrowed shares and adjust the sales charge, if
necessary. An LOI does not constitute a binding commitment by an investor to
<PAGE> 190
purchase, or by the Fund to sell, any additional Class A shares and may be
terminated at any time.
DEFERRED SALES CHARGE ON CLASS B SHARES
Investments in Class B shares are purchased at net asset value per
share without the imposition of an initial sales charge so that the Fund will
receive the full amount of the purchase payment.
Contingent Deferred Sales Charge. Class B shares which are redeemed within six
years of purchase will be subject to a contingent deferred sales charge ("CDSC")
at the rates set forth in the Class A and Class B Prospectus as a percentage of
the dollar amount subject to the CDSC. The charge will be assessed on an amount
equal to the lesser of the current market value or the original purchase cost of
the Class B shares being redeemed. Accordingly, no CDSC will be imposed on
increases in account value above the initial purchase prices, including Class B
shares derived from reinvestment of dividends or capital gains distributions.
The amount of the CDSC, if any, will vary depending on the number of
years from the time of payment for the purchase of Class B shares until the time
of redemption of such shares. Solely for purposes of determining the number of
years from the time of any payment for the purchases of shares, all payments
during a month will be aggregated and deemed to have been made on the last day
of the month.
Proceeds from the CDSC are paid to John Hancock Funds and are used in
whole or in part by John Hancock Funds to defray its expenses related to
providing distribution-related services to the Fund in connection with the sale
of the Class B shares, such as the payment of compensation to select Selling
Brokers for selling Class B shares. The combination of the CDSC and the
distribution and service fees facilitates the ability of the Fund to sell the
Class B shares without a sales charge being deducted at the time of the
purchase. See the Class A and Class B Prospectus for additional information
regarding the CDSC.
SPECIAL REDEMPTIONS
Although it would not normally do so, the Fund has the right to pay the
redemption price of shares of the Fund in whole or in part in portfolio
securities as prescribed by the Trustees. If the shareholder were to sell
portfolio securities received in this fashion he would incur a brokerage charge.
Any such securities would be valued for the purposes of making such payment at
the same value as used in determining net asset value. The Fund has, however,
elected to be governed by Rule 18f-1 under the Investment Company Act. Under
that rule, the Fund must redeem its shares for cash except to the extent that
the redemption payments to any shareholder during any 90-day period would exceed
the lesser of $250,000 or 1% of the Fund's net asset value at the beginning of
such period.
ADDITIONAL SERVICES AND PROGRAMS
Exchange Privilege. As described more fully in the Prospectus, the Fund permits
exchanges of shares of any class of the Fund for shares of the same class in any
other John Hancock fund offering that class.
Systematic Withdrawal Plan. As described briefly in the Class A and Class B
Prospectus, the Fund permits the establishment of a Systematic Withdrawal Plan.
Payments under this plan represent proceeds arising from the redemption of Fund
shares. Since the redemption price of Fund the shares may be more or less than
the shareholder's cost, depending upon the market value of the securities owned
by the Fund at the time of redemption, the distribution of cash pursuant to this
plan may result in realization of gain or loss for purposes of Federal, state
and local income taxes. The maintenance of a Systematic Withdrawal Plan
concurrently with purchases of additional Class A or Class B shares of the Fund
could be disadvantageous to a shareholder because of the initial sales charge
payable on such purchases of Class A shares and the CDSC imposed on redemptions
of Class B shares and because redemptions are taxable events. Therefore, a
shareholder should not purchase Fund shares at the same time as a Systematic
<PAGE> 191
Withdrawal Plan is in effect. The Fund reserves the right to modify or
discontinue the Systematic Withdrawal Plan of any shareholder on 30 days' prior
written notice to such shareholder, or to discontinue the availability of such
plan in the future. The shareholder may terminate the plan at any time by giving
proper notice to Investor Services.
Monthly Automatic Accumulation Program ("MAAP"). This program is explained fully
in the Fund's Class A and Class B Prospectus and the Account Privileges
Application. The program, as it relates to automatic investment checks, is
subject to the following conditions:
The investments will be drawn on or about the day of the month
indicated.
The privilege of making investments through the Monthly Automatic
Accumulation Program may be revoked by Investor Services without prior notice if
any investment is not honored by the shareholder's bank. The bank shall be under
no obligation to notify the shareholder as to the non-payment of any check.
The program may be discontinued by the shareholder either by calling
Investor Services or upon written notice to Investor Services which is received
at least five (5) business days prior to the due date of any investment.
Reinvestment Privilege. A shareholder who has redeemed Fund shares may, within
120 days after the date of redemption, reinvest without payment of a sales
charge any part of the redemption proceeds in shares of the same class of the
Fund or another John Hancock mutual fund, subject to the minimum investment
limit in that fund. The proceeds from the redemption of Class A shares may be
reinvested at net asset value without paying a sales charge in Class A shares of
the Fund or in Class A shares of another John Hancock fund. If a CDSC was paid
upon a redemption, a shareholder may reinvest the proceeds from that redemption
at net asset value in additional shares of the class from which the redemption
was made. The shareholder's account will be credited with the amount of any CDSC
charged upon the prior redemption and the new shares will continue to be subject
to the CDSC. The holding period of the shares acquired through reinvestment
will, for purposes of computing the CDSC payable upon a subsequent redemption,
include the holding period of the redeemed shares. The Fund may modify or
terminate the reinvestment privilege at any time.
A redemption or exchange of Fund shares is a taxable transaction for
Federal income tax purposes even if the reinvestment privilege is exercised, and
any gain or loss realized by a shareholder on the redemption or other
disposition of Fund shares will be treated for tax purposes as described under
the caption "Tax Status."
DESCRIPTION OF THE FUND'S SHARES
The Trustees of the Fund are responsible for the management and
supervision of the Fund. The Declaration of Trust permits the Trustees to issue
an unlimited number of full and fractional shares of beneficial interest without
par value. Under the Declaration of Trust, the Trustees have the authority to
create and classify shares of beneficial interest in separate series, without
further action by shareholders. As of the date of this Statement of Additional
Information, the Trustees have authorized shares of the Fund but not any
additional series, although they may do so in the future. The Declaration of
Trust also authorizes the Trustees to classify and reclassify the shares of the
Trust, or any other series of the Trust, into one or more classes. As of the
date of this Statement of Additional Information, the Trustees have authorized
the issuance of two classes of shares of the Fund, designated as Class A and
Class B.
The shares of each class of the Fund represent an equal proportionate
interest in the aggregate net assets attributable to that class of the Fund.
Class A shares and Class B shares of the Fund will be sold exclusively to
members of the public (other than the institutional investors described in the
Prospectuses) at net asset value. A sales charge will be imposed either at the
time of the purchase, for Class A shares, or on a contingent deferred basis, for
Class B shares. For Class A shares, no sales charge is payable at the time of
purchase on investments of $1 million or more, but for such investments a
contingent deferred sales charge may be imposed in the event of certain
redemption transactions within one year of purchase
<PAGE> 192
Holders of Class A and Class B shares each have certain exclusive
voting rights on matters relating to their respective Rule 12b-1 distribution
plans. The different classes of the Fund may bear different expenses relating to
the cost of holding shareholder meetings necessitated by the exclusive voting
rights of any class of shares.
Dividends paid by the Fund, if any, with respect to each class of
shares will be calculated in the same manner, at the same time and on the same
day and will be in the same amount, except that (i) Class B shares will pay
higher distribution and service fees than Class A shares and (ii) each of Class
A shares and Class B shares will bear any class expenses properly allocable to
such class of shares, subject to the conditions set forth in a private letter
ruling that the Fund has received from the Internal Revenue Service relating to
its multiple-class structure. Similarly, the net asset value per share may vary
depending whether Class A shares or Class B shares are purchased. In the event
of liquidation, shareholders of each class are entitled to share pro rata in the
net assets of the Fund available for distribution to these shareholders. Shares
entitle their holders to one vote per share, are freely transferable and have no
preemptive subscription or conversion rights. When issued, shares are fully paid
and non-assessable, except as set forth below.
Unless otherwise required by the Investment Company Act or the
Declaration of Trust, the Fund has no intention of holding annual meetings of
shareholders. Fund shareholders may remove a Trustee by the affirmative vote of
at least two-thirds of the Fund's outstanding shares and the Trustees shall
promptly call a meeting for such purpose when requested to do so in writing by
the record holders of not less than 10% of the outstanding shares of the Fund.
Shareholders may, under certain circumstances, communicate with other
shareholders in connection with requesting a special meeting of shareholders.
However, at any time that less than a majority of the Trustees holding office
were elected by the shareholders, the Trustees will call a special meeting of
shareholders for the purpose of electing Trustees.
Under Massachusetts law, shareholders of a Massachusetts business trust
could, under certain circumstances, be held personally liable for acts or
obligations of the trust. However, the Fund's Declaration of Trust contains an
express disclaimer of shareholder liability for acts, obligations or affairs of
the Fund. The Declaration of Trust also provides for indemnification out of the
Fund's assets for all losses and expenses of any shareholder held personally
liable by reason of being or having been a shareholder. Liability is therefore
limited to circumstances in which the Fund itself would be unable to meet its
obligations, and the possibility of this occurrence is remote.
TAX STATUS
The Fund has qualified and elected and intends to continue to be
treated as a "regulated investment company" under Subchapter M of the Internal
Revenue Code of 1986, as amended (the "Code"). As such and by complying with the
applicable provisions of the Code regarding the sources of its income, the
timing of its distributions and the diversification of its assets, the Fund will
not be subject to Federal income tax on tax-exempt income or taxable income
(including net realized capital gains) distributed to shareholders at least
annually in accordance with the timing requirements of the Code.
The Fund will be subject to a four percent nondeductible Federal excise
tax on certain taxable amounts not distributed (and not treated as having been
distributed) on a timely basis in accordance with annual minimum distribution
requirements. The Fund intends under normal circumstances to avoid liability for
such tax by satisfying such distribution requirements.
Distributions from the Fund's current or accumulated earnings and
profits ("E&P"), as computed for Federal income tax purposes, will be taxable as
described in the Fund's Prospectus whether taken in shares or in cash. Amounts
that are not allowable as a deduction in computing taxable income, including
expenses associated with earning tax-exempt interest income, do not reduce
current E&P for this purpose. Distributions, if any, in excess of E&P will
constitute a return of capital, which will first reduce an investor's tax basis
in Fund shares and thereafter (after such basis is reduced to zero) will
<PAGE> 193
generally give rise to capital gains. Taxable distributions include
distributions from income or gains from the Fund's taxable investments,
including repurchase agreements, securities loans, options and futures, any
dispositions of the rights to acquire when-issued securities prior to issuance,
income attributable to accrued market discount, and a portion of the discount
from certain stripped tax-exempt obligations or their coupons. Corporate
shareholders of the Fund will not be entitled to the corporate dividends
received deduction for any of the Fund's dividends or other distributions.
Shareholders electing to receive distributions in the form of additional shares
will have a cost basis for Federal income tax purposes in each share so received
equal to the amount of cash that they would have received had they elected to
receive the distribution in cash, dividend by the number of shares received.
Distributions of the tax-exempt interest (i.e., interest excludable
from gross income under the Code) the Fund earns will be treated as tax-exempt
interest in shareholders' hands provided that, as anticipated, the Fund
qualifies as a regulated investment company, has at least 50% of the value of
its total assets at the end of each quarter of its taxable year invested in
tax-exempt obligations, and properly designates such distributions as
"exempt-interest dividends."
Interest income from certain types of tax-exempt bonds that are private
activity bonds in which the Fund may invest is treated as an item of tax
preference for purposes of the Federal alternative minimum tax. To the extent
that the Fund invests in these types of tax-exempt bonds, shareholders will be
required to treat as an item of tax preference for Federal alternative minimum
tax purposes that part of the Fund's exempt-interest dividends which is derived
from interest on these tax-exempt bonds. Further, exempt-interest dividends
derived from tax-exempt interest income that is not an item of tax preference
will be included in corporate "adjusted current earnings" for purposes of
computing the alternative minimum tax liability, if any, of corporate
shareholders of the Fund.
The amount of net realized capital gains, if any, in any given year
will vary depending upon the Adviser's current investment strategy and whether
the Adviser believes it to be in the best interest of the Fund to dispose of
portfolio securities that will generate capital gains or to enter into options
or futures transactions. At the time of an investor's purchase of Fund shares, a
portion of the purchase price is often attributable to realized or unrealized
appreciation in the Fund's portfolio or undistributed taxable income of the
Fund. Consequently, subsequent distributions from such appreciation or income
may be taxable to such investor even if the net asset value of the investor's
shares is, as a result of the distributions, reduced below the investor's cost
for such shares, and the distributions in reality represent a return of a
portion of the purchase price.
Upon a redemption of shares (including by exercise of the exchange
privilege) a shareholder will ordinarily realize a taxable gain or loss
depending upon his basis in his shares. This gain or loss will be treated as
capital gain or loss if the shares are capital assets in the shareholder's hands
and will be long-term or short-term, depending upon the shareholder's tax
holding period for the shares. Shareholders should consider, in determining the
timing of any redemption, that the portion of a redemption distribution
attributable to tax-exempt interest income that the Fund has accrued but not yet
declared as a dividend will be treated as part of the proceeds of the redemption
of shares in determining any gain or loss, rather than as tax-exempt interest.
Consequently, redeeming shares shortly before the anticipated record date of a
forthcoming exempt-interest dividend may result in the realization of a larger
gain (or a smaller loss) than if the redemption had occurred shortly after
receipt of the exempt-interest dividend, and the effect may be to convert an
amount that would have been tax-exempt (the accrued tax-exempt interest) into an
amount that is taxable as part of the redemption proceeds. A sales charge paid
in purchasing Class A shares of the Fund cannot be taken into account for
purposes of determining gain or loss on the redemption or exchange of these
shares within ninety (90) days after their purchase to the extent Class A shares
of the Fund or another John Hancock fund are subsequently acquired without
payment of a sales charge pursuant to the reinvestment or exchange privileges.
This disregarded charge will result in an increase in the shareholder's tax
basis in the shares subsequently acquired. Also, any loss realized on a
redemption or exchange may be disallowed for tax purposes to the extent the
shares disposed of are replaced with other shares of the Fund within a period of
<PAGE> 194
sixty-one (61) days beginning thirty (30) days before and ending thirty (30)
days after the shares are disposed of, such as pursuant to the Dividend
Reinvestment Plan. In such a case, the basis of the shares acquired will be
adjusted to reflect the disallowed loss. Any loss realized upon the redemption
of shares with a tax holding period of six months or less will be disallowed to
the extent of any exempt-interest dividends received with respect to such
shares, and any such loss not disallowed will be treated as a long-term capital
loss to the extent of any amounts treated as distributions of long-term capital
gain with respect to such shares.
Although its present intention is to distribute all net capital gains
annually, if any, the Fund reserves the right to retain and reinvest all or any
portion of the excess, as computed for Federal income tax purposes, of net
long-term capital gain over net short-term capital loss in any year. The Fund
will not in any event distribute net long-term capital gains realized in any
year to the extent that a capital loss is carried forward from prior year
against such gain. To the extent such excess was retained and not exhausted by
the carryforward of prior years' capital losses, it would be subject to Federal
income tax in the hands of the Fund. Each shareholder would be treated for
Federal income tax purposes as if the Fund had distributed to him on the last
day of its taxable year his pro rata share of such excess, and he had paid his
pro rata share of the taxes paid by the Fund and reinvested the remainder in the
Fund. Accordingly, each shareholder would (a) include his pro rata share of such
excess as long-term capital gain income in his tax return for his taxable year
in which the last day of the Fund's taxable year falls, (b) be entitled either
to a tax credit on his return for, or to a refund of, his pro rata share of the
taxes paid by the Fund, and (c) be entitled to increase the adjusted tax basis
for his shares in the Fund by the difference between his pro rata share of this
excess and his pro rata share of such taxes.
The percentage of Fund income that is tax-exempt is applied uniformly
to all distributions made during each calendar year to determine the percentage
of distributions to shareholders which will be treated as exempt-interest
dividends. As a result, the percentage of distributions designated as
exempt-interest dividends on shares held for less than a full calendar year may
differ from the percentage of the Fund's income which is tax-exempt during the
period for which the distributions are received. However, because the Fund
invests primarily in tax-exempt bonds, the percentage of its income which is
tax-exempt for the calendar year will generally be substantially the same as the
tax-exempt portion of income actually earned during any distribution period.
Shareholders are required to report their receipt of tax-exempt distributions
under the Code.
Interest on indebtedness incurred by a shareholder to purchase or carry
shares of the Fund will not be deductible for Federal income tax purposes to the
extent it is deemed related to the Fund's exempt-interest dividends. Moreover,
pursuant to published guidelines, the Internal Revenue Service may deem
indebtedness to have been incurred for the purpose of acquiring or carrying
shares of the Fund even though the borrowed funds may not be directly traceable
to the purchase of shares.
Shares of the Fund may not be an appropriate investment for persons who
are "substantial users" of facilities financed by private activity bonds and
industrial development bonds or persons related to such "substantial users."
Such persons should consult their tax advisers before investing in shares of the
Fund.
For Federal income tax purposes, the Fund is permitted to carry forward
a net capital loss in any year to offset net capital gains, if any, during the
eight years following the year of the loss. To the extent subsequent net capital
gains are offset by such losses, they would not result in Federal income tax
liability to the Fund and, as noted above, would not be distributed to
shareholders. The Fund has $2,374,664 of capital loss carryforward available to
the extent provided by regulations, to offset future net realized capital gains.
The carryforward expires December 31, 2002.
Limitations imposed by the Code on regulated investment companies like
the Fund may restrict the Fund's ability to enter into futures and options
transactions. The options and futures transactions undertaken by the Fund may
cause the Fund to recognize taxable capital gains or losses from marking to
market even though its positions have not been sold or terminated and affect the
character as long-term or short-term, and timing, of some capital gains and
<PAGE> 195
losses realized by the Fund. Also, some of the Fund's losses on its transactions
involving options and futures contracts and/or offsetting portfolio positions
may be deferred rather than being taken into account currently in calculating
the Fund's taxable income. The tax provisions applicable to these transactions,
including these mark to market, recharacterization, and loss deferral rules, may
affect the amount, timing and character of the Fund's distributions to
shareholders. Some of the applicable tax rules may be modified if the Fund is
eligible and chooses to make one or more of certain tax elections that may be
available. The Fund will take into account the special tax rules (including
consideration of available elections) applicable to options and futures
contracts in order to minimize any potential adverse tax consequences.
The foregoing discussion relates solely to U.S. Federal income tax law
as applicable to U.S. persons (i.e., U.S. citizens or residents and U.S.
domestic corporations, partnerships, trusts or estates) subject to tax under
this law. The discussion does not address special tax rules applicable to
certain classes of investors, such as tax-exempt entities, insurance companies
and financial institutions.. Dividends, capital gain distributions, and
ownership of or gains realized on the redemption (including an exchange) of Fund
shares may also be subject to state and local taxes. A state income (and
possibly local income and/or intangible property) tax exemption is generally
available to the extent the Fund's distributions are derived from interest on
(or, in the case of intangibles taxes, the value of its assets is attributable
to) certain U.S. Government obligations and/or tax-exempt municipal obligations
issued by or on behalf of the particular state or a political subdivision
thereof, provided in some states that certain thresholds for holdings of such
obligations and/or reporting requirements are satisfied. Shareholders should
consult their own tax advisors as to the Federal, state or local tax
consequences of ownership of shares of, and receipt of distributions from, the
Fund in their particular circumstances.
Non-U.S. investors not engaged in a U.S. trade or business with which
their Fund investment is effectively connected will be subject to U.S. Federal
income tax treatment that is different from that described above. These
investors may be subject to non-resident alien withholding tax at the rate of
30% (or a lower rate under an applicable tax treaty) on amounts treated as
ordinary dividends from the Fund and, unless an effective IRS Form W-8 or
authorized substitute is on file, to 31% backup withholding on certain other
payments from the Fund. Non-U.S. investors should consult their tax advisers
regarding such treatment and the application of foreign taxes to an investment
in the Fund.
The Fund is not subject to Massachusetts corporate franchise or
corporate excise taxes. Provided that the Fund qualifies as a regulated
investment company under the Code, it will also not be required to pay any
Massachusetts income tax.
CALCULATION OF PERFORMANCE
For the 30-day period ended December 31, 1994, the Fund's annualized
yield was 5.43% for Class A and 4.97% for Class B, respectively. The average
annual total return of the Class A shares of the Fund for the 1, 5 and 10 years
ended December 31, 1994 was (10.14)%, 5.29%, and 8.73%, respectively. The
cumulative total return since inception of Class B shares of the Fund was
(10.92)% as of December 31, 1994.
The Fund's yield is computed by dividing net investment income per
share determined for a 30-day period by the maximum offering price per share
(which includes the full sales charge) on the last day of the period, according
to the following standard formula:
_ _
| a - b 6 |
Yield = 2 | (_____ + 1) -1 |
|_ cd _|
Where:
a = dividends and interest earned during the period.
b = net expenses accrued during the period.
c = the average daily number of fund shares outstanding during the period that
<PAGE> 196
would be entitled to receive dividends.
d = the maximum offering price per share on the last day of the period (NAV
where applicable).
The Fund may advertise a tax-equivalent yield, which is computed by
dividing that portion of the yield of the Fund which is Tax-Exempt by one minus
a stated income tax rate and adding the product to that portion, if any, of the
yield of the Fund that is not Tax-Exempt. John Hancock Tax-Exempt Income Fund's
tax equivalent yield at a 31% and 36% tax rate for the 30 day period ended
December 31, 1994 was 7.87% and 8.48% for Class A shares and 7.20% and 7.77% for
Class B shares.
The Fund's total return is computed by finding the average annual
compounded rate of return over the 1 year, 5 year and 10 year periods that would
equate the initial amount invested to the ending redeemable value according to
the following formula:
____________________
n /
/ -1
T = V ERV / P
Where:
P = a hypothetical initial investment of $1,000.
T = average annual total return.
n = number of years.
ERV = ending redeemable value of a hypothetical $1,000 investment made at the
beginning of the 1 year, 5 year and life-of-fund periods.
In the case of Class A shares or Class B shares, this calculation
assumes the maximum sales charge is included in the initial investment or the
CDSC is applied at the end of the period. This calculation also assumes that all
dividends and distributions are reinvested at net asset value on the
reinvestment dates during the period. The "distribution rate" is determined by
annualizing the result of dividing the declared dividends of the Fund during the
period stated by the maximum offering price or net asset value at the end of the
period.
In addition to average annual total returns, the Fund may quote
unaveraged or cumulative total returns reflecting the simple change in value of
an investment over a stated period. Cumulative total returns may be quoted as a
percentage or as a dollar amount, and may be calculated for a single investment,
a series of investments, and/or a series of redemptions, over any time period.
Total returns may be quoted with or without taking the Fund's 4.50% sales charge
on Class A shares or the 5.00% CDSC on Class B shares into account. Excluding
the Fund's sales charge on Class A shares and the CDSC on Class B shares from a
total return calculation produces a higher total return figure.
From time to time, in reports and promotional literature, the Fund's
yield and total return will be compared to indices of mutual funds and bank
deposit vehicles such as Lipper Analytical Services, Inc.'s "Lipper - Fixed
Income Fund Performance Analysis," a monthly publication which tracks net
assets, total return, and yield on approximately 1,700 fixed income mutual funds
in the United States. Ibottson and Associates, CDA Weisenberger and F.C. Towers
are also used for comparison purposes, as well as the Russell and Wilshire
Indices.
Performance rankings and ratings reported periodically in national
financial publications such as MONEY Magazine, FORBES, BUSINESS WEEK, THE WALL
STREET JOURNAL, MICROPAL, INC., MORNINGSTAR, STANGER'S and BARRON'S, etc. will
also be utilized.
The performance of the Fund is not fixed or guaranteed. Performance
quotations should not be considered to be representations of performance of the
Fund for any period in the future. The performance of the Fund is a function of
many factors including its earnings, expenses and number of outstanding shares.
Fluctuating market conditions; purchases, sales and maturities of portfolio
securities; sales and redemptions of shares of beneficial interest; and changes
in operating expenses are all examples of items that can increase or decrease
<PAGE> 197
the Fund's performance.
BROKERAGE ALLOCATION
Decisions concerning the purchase and sale of portfolio securities and
the allocation of brokerage commissions are made by the Adviser pursuant to
recommendations made by its investment committee, which consists of officers and
directors of the Adviser and affiliates and officers and Trustees who are
interested persons of the Fund. Orders for purchases and sales of securities are
placed in a manner which, in the opinion of the Adviser, will offer the best
price and market for the execution of each such transaction. Purchases from
underwriters of portfolio securities may include a commission or commissions
paid by the issuer and transactions with dealers serving as market makers
reflect a "spread." Investments in debt securities are generally traded on a net
basis through dealers acting for their own account as principals and not as
brokers; no brokerage commissions are payable on such transactions.
The Fund's primary policy is to execute all purchases and sales of
portfolio instruments at the most favorable prices consistent with best
execution, considering all of the costs of the transaction including brokerage
commissions. This policy governs the selection of brokers and dealers and the
market in which a transaction is executed. Consistent with the foregoing primary
policy, the Rules of Fair Practice of the National Association of Securities
Dealers, Inc. and other policies that the Trustees may determine, the Adviser
may consider sales of shares of the Fund as a factor in the selection of
broker-dealers to execute the Fund's portfolio transactions.
To the extent consistent with the foregoing, the Fund will be governed
in the selection of brokers and dealers, and the negotiation of brokerage
commission rates and dealer spreads, by the reliability and quality of the
services, including primarily the availability and value of research information
and to a lesser extent statistical assistance furnished to the Adviser of the
Fund, and their value and expected contribution to the performance of the Fund.
It is not possible to place a dollar value on information and services to be
received from brokers and dealers, since it is only supplementary to the
research efforts of the Adviser. The receipt of research information is not
expected to reduce significantly the expenses of the Adviser. The research
information and statistical assistance furnished by brokers and dealers may
benefit the Life Insurance Company or other advisory clients of the Adviser,
and, conversely, brokerage commissions and spreads paid by other advisory
clients of the Adviser may result in research information and statistical
assistance beneficial to the Fund. The Fund will make no commitments to allocate
portfolio transactions upon any prescribed basis. While the Fund's officers will
be primarily responsible for the allocation of the Fund's brokerage business,
their policies and practices in this regard must be consistent with the
foregoing and will at all times be subject to review by the Trustees. For the
years ended on December 31, 1993 and 1992, no negotiated brokerage commissions
were paid on portfolio transactions. For 1994, negotiated brokerage commissions
were $28,975.
As permitted by Section 28(e) of the Securities Exchange Act of 1934,
the Fund may pay to a broker which provides brokerage and research services to
the Fund an amount of disclosed commission in excess of the commission which
another broker would have charged for effecting that transaction. This practice
is subject to a good faith determination by the Trustees that the price is
reasonable in light of the services provided and to policies that the Trustees
may adopt from time to time. During the fiscal year ended December 31, 1994, the
Fund did not pay commissions as compensation to any brokers for research
services such as industry, economic and company reviews and evaluations of
securities.
The Adviser's indirect parent, the Life Insurance Company, is the
indirect sole shareholder of John Hancock Freedom Securities Corporation and its
subsidiaries, three of which, Tucker Anthony Incorporated ("Tucker Anthony")
John Hancock Distributors, Inc. ("Distributors") and Sutro & Company, Inc.
("Sutro"), are broker-dealers ("Affiliated Brokers"). Pursuant to procedures
determined by the Trustees and consistent with the above policy of obtaining
best net results, the Fund may execute portfolio transactions with or through
Affiliated Brokers. During the year ended December 31, 1994, the Fund did not
execute any portfolio transactions with Affiliated Brokers.
<PAGE> 198
Any of the Affiliated Brokers may act as broker for the Fund on
exchange transactions, subject, however, to the general policy of the Fund set
forth above and the procedures adopted by the Trustees pursuant to the
Investment Company Act. Commissions paid to an Affiliated Broker must be at
least as favorable as those which the Trustees believe to be contemporaneously
charged by other brokers in connection with comparable transactions involving
similar securities being purchased or sold. A transaction would not be placed
with an Affiliated Broker if the Fund would have to pay a commission rate less
favorable than the Affiliated Broker's contemporaneous charges for comparable
transactions for its other most favored, but unaffiliated, customers, except for
accounts for which the Affiliated Broker acts as clearing broker for another
brokerage firm, and any customers of the Affiliated Broker not comparable to the
Fund as determined by a majority of the Trustees who are not interested persons
(as defined in the Investment Company Act) of the Fund, the Adviser or the
Affiliated Brokers. Because the Adviser, which is affiliated with the Affiliated
Brokers, has, as an investment adviser to the Fund, the obligation to provide
investment management services, which includes elements of research and related
investment skills, such research and related skills will not be used by the
Affiliated Brokers as a basis for negotiating commissions at a rate higher than
that determined in accordance with the above criteria. The Fund will not effect
principal transactions with Affiliated Brokers.
TRANSFER AGENT SERVICES
John Hancock Investor Services Corporation. ("Investor Services"), P.O.
Box 9116, Boston, MA 02205-9116, a wholly owned indirect subsidiary of the Life
Insurance Company, is the transfer and dividend paying agent for the Fund. The
Fund pays Investor Services an annual fee for Class A of $19.00 per shareholder
account and for Class B shares $21.50, plus certain out-of-pocket expenses.
CUSTODY OF PORTFOLIO
Portfolio securities of the Fund are held pursuant to a custodian
agreement between the Fund and Investors Bank & Trust Company, 24 Federal
Street, Boston, Massachusetts 02110. Under the custodian agreement, Investors
Bank & Trust performs custody, portfolio and Fund accounting services.
INDEPENDENT AUDITORS The independent auditors of the Fund are Ernst &
Young LLP, 200 Clarendon Street, Boston, Massachusetts 02116. Ernst & Young
audits and renders an opinion of the Fund's annual financial statements and
prepares the Fund's annual Federal income tax return.
<PAGE> 199
APPENDIX A
TAX EXEMPT BOND RATINGS
Below is a description of the six ratings that may apply to the Fund's
investments in Tax-Exempt Bonds.
TAX-EXEMPT BOND RATINGS
Moody's describes its six highest ratings for Tax-Exempt Bonds as
follows:
Bonds which are rated Aaa are judged to be of the best quality. They
carry the smallest degree of investment risk and are generally referred to as
'gilt edge'. Interest payments are protected by a large or by an exceptionally
stable margin and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
Bonds which are rated Aa are judged to be of high quality by all
standards. Together with the Aaa group they comprise what are generally known as
high grade bonds. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities or fluctuation of protective
elements may be of greater amplitude or there may be other elements present
which make the long term risks appear somewhat larger than in Aaa securities.
Bonds which are rated A possess many favorable investment attributes
and are to be considered as upper medium grade obligations. Factors giving
security to principal and interest are considered adequate but elements may be
present which suggest a susceptibility to impairment some time in the future.
Bonds which are rated Baa are considered as medium grade obligations;
i.e., they are neither highly protected nor poorly secured. Interest payments
and principal security appear adequate for the present but certain protective
elements may be lacking or may be characteristically unreliable over any great
length of time. Such bonds lack outstanding investment characteristics and in
fact have speculative characteristics as well.
Bonds which are rated Ba are judged to have speculative elements; their
future cannot be considered as well assured. Often the protection of interest
and principal payments may be very moderate and thereby not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
Bonds which are rated B generally lack characteristics of a desirable
investment. Assurance of interest and principal payments or of maintenance of
other terms of the contract over any long period of time may be small.
The six highest ratings of Standard & Poor's for Tax-Exempt Bonds are
AAA (Prime), AA (High Grade), A (Good Grade), BBB (Medium Grade), BB and B:
AAA This is the highest rating assigned by Standard & Poor's to a
debt obligation and indicates an extremely strong capacity to
pay principal and interest.
AA Bonds rated AA also qualify as high-quality debt obligations.
Capacity to pay principal and interest is very strong, and in
the majority of instances they differ from AAA issues only in
small degree.
A Bonds rated A have a strong capacity to pay principal and
interest, although they are somewhat more susceptible to the
adverse effects of changes in circumstances and economic
conditions.
BBB Bonds rated BBB are regarded as having an adequate capacity to
pay principal and interest. Whereas they normally exhibit
protection parameters, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity
to pay principal and interest for bonds in this category than
for bonds in the A category.
<PAGE> 200
BB Debt rated BB has less near-term vulnerability to default than
other speculative issues. However, it faces major ongoing
uncertainties or exposure to adverse business, financial, or
economic conditions which could lead to inadequate capacity to
meet timely interest and principal payments. The BB rating
category is also used for debt subordinated to senior debt
that is assigned an actual or implied BBB- rating.
B Debt rated B has a greater vulnerability to default but
currently has the capacity to meet interest payments and
principal repayments. Adverse business, financial, or economic
conditions will likely impair capacity or willingness to pay
interest and repay principal. The B rating category is also
used for debt subordinated to senior debt that is assigned an
actual or implied BB or BB- rating.
Fitch describes its ratings for Tax-Exempt Bonds as follows:
AAA Bonds considered to be investment grade and of the highest
credit quality. The obligor has an exceptionally strong
ability to pay interest and repay principal, which is unlikely
to be affected by reasonably foreseeable events.
AA Bonds considered to be investment grade and of very high
credit quality. The obligor's ability to pay interest and
repay principal is very strong, although not quite as strong
as bonds rated "AAA". Because bonds rated in the "AAA" and
"AA" categories are not significantly vulnerable to foresee
uture developments, short-term debt of these issuers is
generally rated F-1+.
A Bonds considered to be investment grade and of high credit
quality. The obligor's ability to pay interest and repay
principal is considered strong, but may be more vulnerable to
adverse changes in economic conditions and circumstances than
bonds with higher ratings.
BBB Bonds considered to be investment grade and of satisfactory
credit quality. The obligor's ability to pay interest and
repay principal is considered to be adequate. Adverse changes
in economic conditions and circumstances, however, are more
likely to have adverse impact on these bonds and, therefore,
impair timely payment. The likelihood that the ratings of
these bonds will fall below investment grade is higher than
for bonds with higher ratings.
BB Bonds are considered speculative. The obligor's ability to pay
interest and repay principal may be affected over time by
adverse economic changes. However, business and financial
alternatives can be identified that could assist the obligor
in satisfying its debt service requirements.
B Bonds are considered highly speculative. While bonds in this
class are currently meeting debt service requirements, the
probability of continued timely payment of principal and
interest reflects the obligor's limited margin of safety and
the need for reasonable business and economic activity
throughout the life of the issue.
Moody's ratings for state and municipal notes and other short-term
loans are designated Moody's Investment Grade (MIG). This distinction is in
recognition of the differences between short-term credit risk and long-term
risk. Factors affecting the liquidity of the borrower are uppermost in
importance in short-term borrowing, while various factors of the first
importance in bond risk are of lesser importance in the short-term run. Symbols
used will be as follows:
MIG 1 Loans bearing this designation are of the best quality, enjoying
strong protection from established cash flows of funds for their
servicing or from established and broad-based access to the market for
refinancing, or both.
<PAGE> 201
MIG 2 Loans bearing this designation are of high quality, with margins
of protection ample although not so large as in the preceding group.
MIG 3 Loans bearing this designation are of favorable quality, with all
securities elements accounted for but lacking the undeniable strength
of the preceding grades. Market access for refinancing, in particular,
is likely to be less well established.
Standard & Poor's ratings for state and municipal notes and other
short-term loans are designated Standard & Poor's Grade (SP).
SP-1 Very strong or strong capacity to pay principal and interest.
Those issues determined to possess overwhelming safety characteristics
will be given a plus (+) designation.
SP-2 Satisfactory capacity to pay principal and interest.
SP-3 Speculative capacity to pay principal and interest.
Fitch Ratings for short-term debt obligations that are payable on
demand or have original maturities of up to three years including commercial
paper, certificates of deposits, medium term notes and municipal and investment
notes are designated by the following ratings:
F-1+ Exceptionally Strong Credit Quality. Issues assigned this
rating are regarded as having the strongest degree of assurance for
timely payment.
F-1 Very Strong Credit Quality. Issues assigned this rating reflect an
assurance of timely payment only slightly less in degree than issues
rated F-1+.
F-2 Good Credit Quality. Issues assigned this rating have a
satisfactory degree of assurance for timely payment, but the margin for
safety is not as great as for issues assigned F-1+ and F-1 ratings.
F-S Weak Credit Quality. Issues assigned this rating have
characteristics suggesting a minimal degree of assurance for timely
payment and are vulnerable to near-term adverse changes in financial
and economic conditions.
<PAGE> 202
FINANCIAL STATEMENTS
The Fund's financial statements at December 31, 1994 are incorporated
by reference to the filing: 1994 Annual Report to Shareholders, as filed with
the Securities and Exchange Commission on March 2, 1995 (accession number:
000095135-95-000336)
<PAGE> 203
John Hancock Funds
- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -
Tax-Exempt
Income
Fund
ANNUAL REPORT
December 31, 1995
<PAGE> 204
TRUSTEES
EDWARD J. BOUDREAU, JR.
Chairman
DENNIS S. ARONOWITZ*
RICHARD P. CHAPMAN, JR.*
WILLIAM J. COSGROVE*
GAIL D. FOSLER*
BAYARD HENRY*
RICHARD S. SCIPIONE
EDWARD J. SPELLMAN*
*Members of the Audit Committee
OFFICERS
EDWARD J. BOUDREAU, JR.
Chairman and Chief Executive Officer
ROBERT G. FREEDMAN
Vice Chairman and
Chief Investment Officer
ANNE C. HODSDON
President
THOMAS H. DROHAN
Senior Vice President and Secretary
JAMES B. LITTLE
Senior Vice President and
Chief Financial Officer
SUSAN S. NEWTON
Vice President, Assistant Secretary and
Compliance Officer
JAMES J. STOKOWSKI
Vice President and Treasurer
CUSTODIAN
INVESTORS BANK & TRUST COMPANY
89 SOUTH STREET
BOSTON, MASSACHUSETTS 02111
TRANSFER AGENT
JOHN HANCOCK INVESTOR SERVICES CORPORATION
P.O. BOX 9116
BOSTON, MASSACHUSETTS 02205-9116
INVESTMENT ADVISER
JOHN HANCOCK ADVISERS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
PRINCIPAL DISTRIBUTOR
JOHN HANCOCK FUNDS, INC.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
LEGAL COUNSEL
HALE AND DORR
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
INDEPENDENT AUDITORS
ERNST & YOUNG LLP
200 CLARENDON STREET
BOSTON, MASSACHUSETTS 02116
CHAIRMAN'S MESSAGE
DEAR FELLOW SHAREHOLDERS:
[A 1 1/4" x 1" photo of Edward J. Boudreau Jr., Chairman and Chief Executive
Officer, flush right, next to second paragraph.]
The stock market's record-breaking, whirlwind performance in 1995 will be a
tough act to follow in 1996. In fact, we've already seen greater market
volatility this year, particularly among last year's leaders -- technology
stocks. That's to be expected after a year that saw market indexes soar,
including the Standard & Poor's 500-Stock Index's 37% advance. While many of the
same economic conditions that fostered the stellar 1995 market are still in
place -- slow economic growth, muted inflation and decent corporate earnings --
it would be unrealistic to expect the market to stage a repeat in 1996. The old
saying "trees don't grow to the sky" comes to mind. Shareholders would do well
to temper expectations of investment returns and perhaps revisit their
investment allocations with their financial advisor to determine if rebalancing
their portfolio makes sense.
No matter how you scale back your market expectations, you should always be
able to count on consistent customer service performance. At John Hancock Funds,
we never stop working to find ways to sustain and improve the quality of
information and the level of assistance we provide you. Our commitment to this
task is no less than John Hancock's loyalty was to his fledgling country when he
is said to have uttered, "if it does the public good, burn Boston." We won't go
that far, of course, but we share our namesake's dedication to putting the
public before all else.
In our case, that public is you, our shareholders. We take very seriously the
role you have entrusted to us, that of helping you achieve your financial goals.
Part of that will always involve good customer service. So please do not
hesitate to call your Customer Service Representative at 1-800-225-5291 if you
have any questions or need information. We take pride in helping you with the
same spirit that John Hancock displayed at the dawning of America.
Sincerely,
/s/ Edward J. Boudreau, Jr.
- ---------------------------
EDWARD J. BOUDREAU, JR., CHAIRMAN AND CHIEF EXECUTIVE OFFICER
2
<PAGE> 205
BY THOMAS C. GOGGINS, PORTFOLIO MANAGER
JOHN HANCOCK
TAX-EXEMPT INCOME FUND
MUNICIPAL BONDS ENJOY STRONGEST YEAR IN NEARLY A DECADE
Municipal bonds enjoyed an impressive comeback in 1995, posting some of their
best returns in nearly a decade. From the very outset of the year, all bond
markets, including the municipal market, rallied on news that the economy's rate
of growth was slowing and inflation was subdued. The year-long rally was
beneficial to municipal bonds -- particularly in the first quarter, when they
rated as the top fixed-income category during that period.
However, by spring the municipal bond market stalled as talk of tax reform
took center stage. Investors worried that various proposals -- particularly the
flat-tax proposal -- might affect the attractiveness of municipals if enacted.
That political rhetoric caused municipals to underperform Treasury bonds in the
second quarter. While we and many other market participants believe that the
flat tax doesn't stand much of a chance of being enacted before 1998, if ever,
the market nonetheless used the topic as an excuse to consolidate.
[A 2 1/4" x 3" photo of Thomas C. Goggins at bottom right. Caption reads:
"Thomas C. Goggins, Portfolio Manager".]
By the second half of the year, municipals -- which were priced attractively
relative to taxable bonds at the time -- began to move up again as supply waned
and demand strengthened. Two interest-rate cuts by the Federal Reserve Board
gave the muni market an added boost. All in all, municipal bond funds enjoyed
their strongest performance since 1986.
The municipal bond market's strong performance was reflected in John Hancock
Tax-Exempt Income Fund's performance. For the 12 months ended December 31, 1995,
the Fund's Class A and Class B shares posted total returns of 16.60% and 15.70%,
respectively, at net asset value. Those returns compared to
[CAPTION]
"Municipal bonds enjoyed an impressive comeback in 1995..."
3
<PAGE> 206
John Hancock Funds - Tax-Exempt Income Fund
[Chart with heading "Top Five Sectors" at top of left hand column. The chart
lists five sectors: 1) Electric Utilities 21%; 2) Transportation 20%; 3)
Pollution Control 17%; 4) Health Care 13%; 5) Industrial Revenue Bonds 7%.
Footnote below reads: "As a percentage of net assets on December 31, 1995."]
the average municipal bond fund's return of 16.84% for the same period,
according to Lipper Analytical Services.(1)
STRATEGIC CHANGES
Due to several portfolio changes we made over the past six months, the Fund's
performance gained ground on our competitors throughout the year and ended the
period matching its peers. First, we focused on adding more discount bonds.
During periods of falling interest rates, discount bonds -- which sell below
their par (face) value -- generally appreciate more than par bonds, and more
than premium bonds that sell above par value.
Second, we worked steadily all year to improve the call protection of the
Fund. We did that by adding more non-callable bonds, which can't be redeemed by
their issuer before their scheduled maturity date. Non-callable bonds offer the
advantages of a predictable stream of income and the ability to outperform the
market. What's more, because they are relatively scarce, non-callables tend to
be more easily traded, or liquid.
[Table entitled "Scorecard" at bottom left hand column. The header for the left
column is "Category"' the header for the right column is "Trend...and what's
driving it." The first listing is "Wayne County/Northwest Airlines" followed by
an up arrow and the phrase "Improving profitability for airline". The second
listing is "Indianapolis/United Airlines" followed by an up arrow and the phrase
"Growth in revenues and earnings". The third listing is "Housing bonds" followed
by a flat arrow and the phrase "Rising risk of prepayments". Footnote below
reads: "See "Schedule of Investments." Investment holdings are subject to
change.]
Finally, we actively managed the Fund's duration, which measures how
sensitive its share price is to changes in interest rates. The longer a fund's
duration, the more its share price will rise when interest rates are falling and
fall when interest rates are rising. At the beginning of the year, the Fund's
duration was relatively long, which helped its performance in the first quarter
of the year. But by the end of June, we had shortened our duration in response
to the spring's more volatile market. We reversed course and lengthened our
duration again in mid-summer because we felt that interest rates would continue
to decline. That strategy ultimately benefited the Fund when the Federal Reserve
made two interest rate cuts in the second half of the year.
FOCUS ON SECTORS
While we kept the Fund's stake in health-care bonds steady at about 13% of
investments, we made some changes among those holdings. Heightened competition
and proposed cuts in Medicare and Medicaid have made the fate of many hospitals
and health-care organizations much less certain. As a result, we sold some of
what we believed to be the more vulnerable holdings and concentrated on
individual hospitals that we believe will be able to withstand, and even benefit
from, a more competitive environment.
We used some of the proceeds to purchase industrial revenue bonds, a sector
that generally performed well during the period. Bonds issued by the city of
Walla Walla, Washington for
[CAPTION]
"...industrial revenue bonds... generally performed well during the period."
4
<PAGE> 207
[Bar chart with heading "Fund Performance" at top of left hand column. Under the
heading is the footnote: "For the year ended December 31, 1995." The chart is
scaled in increments of 5% from bottom to top, with 20% at the top and 0% at the
bottom. Within the chart there are three solid bars. The first represents the
16.60% total return for John Hancock Tax-Exempt Income Fund: Class A. The second
represents the 15.70% total return for John Hancock Tax-Exempt Income Fund:
Class B. The third represents the 16.84% total return of the average general
municipal bond fund. A footnote below states: "Total returns for John Hancock
Tax-Exempt Income Fund are at net asset value with all distributions reinvested.
The average general municipal bond fund is tracked by Lipper Analytical
Services. See following page for historical performance information."]
a Scott Paper facility that recycles paper into liner board did well on the
improving fundamentals of the paper industry. During the past six months we also
added some airline bonds including those issued by Wayne County, Michigan for
Northwest Airlines, which will fund the remodeling of the airline's terminal at
Detroit's Metropolitan Airport. Another addition was on airline bond issued by
Indianapolis, Indiana for a United Airlines maintenance facility. These bonds
also performed well as a result of increased profitability in the airline
sector.
Not all sectors of the municipal market participated equally in the rally.
Housing bonds were generally laggards throughout 1995. These bonds typically
underperform other sectors when the market is rising, because there is some
concern that they will be paid off before their scheduled maturity dates.
However, we held onto them because they are generally high-quality bonds which
offer relatively high yields.
OUTLOOK
Political haggling over various tax-reform proposals could continue to draw
headlines in 1996. If that is the case, the municipal bond market could
experience further volatility in the months to come. Our view is that it's
unlikely that any significant tax reform will be enacted within the next two
years. And we're not even convinced that the flat tax is viable. So we think the
market has overreacted.
We believe that the tax-reform scare has actually created an opportunity. At
the end of 1995, municipals were priced attractively compared to Treasuries. In
fact, there was only one other time in recent history that municipals were this
cheap relative to Treasuries. In our experience, it is in times like these that
municipals offer good value for investors seeking after-tax income.
It may be difficult for municipals to achieve the same exceptional gains they
made in 1995. However, there are several reasons why we're optimistic about
1996. We believe that economic growth will continue to slow, inflation will
remain subdued and, as a result, interest rates can continue to fall this year.
Since bond prices generally move in the opposite direction of interest rates,
that could be good news for bonds. What's more, the supply of new municipals
issued should remain relatively weak. And if demand stays constant or improves,
that too could be a positive.
- --------------------------------------------------------------------------------
(1) Figures from Lipper Analytical Services include reinvested dividends and do
not take into account sales charges. Actual load-adjusted performance is
lower.
This commentary reflects the views of the portfolio manager through the end
of the Fund's period discussed in this report. Of course, the manager's
views are subject to change as market and other conditions warrant.
[CAPTION]
"...we're optimistic about 1996."
5
<PAGE> 208
A LOOK AT PERFORMANCE
The tables on the right show the cumulative total returns and the average annual
total returns for the John Hancock Tax-Exempt Income Fund. Total return is a
performance measure that equals the sum of all dividends and capital gains,
assuming reinvestment of these distributions and the change in the price of the
Fund's average net assets. Performance figures include the maximum applicable
sales charge of 4.50% for Class A shares. The effect of the maximum contingent
deferred sales charge for Class B shares (maximum 5% and declining to 0% over
six years) is included in Class B performance. Performance is affected by a
12b-1 plan, which commenced on March 24, 1987 and January 3, 1994 for both Class
A and Class B shares, respectively. Remember that all figures represent past
performance and are no guarantee of how the Fund will perform in the future.
Also, keep in mind that the total return and share price of the Fund's
investments will fluctuate. As a result, your Fund's shares may be worth more or
less than their original cost, depending on when you sell them.
Note: A portion of the Fund's income may be subject to taxes. Some investors may
be subject to the Alternative Minimum Tax. Capital gains are taxable.
CUMULATIVE TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ONE FIVE MOST RECENT
YEAR YEARS TEN YEARS
---- ----- -----------
<S> <C> <C> <C>
Tax-Exempt Income Fund: Class A 11.33% 42.08% 121.64%
Tax-Exempt Income Fund: Class B 10.73% 4.52%(1) N/A
</TABLE>
AVERAGE ANNUAL TOTAL RETURNS
- --------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
ONE FIVE MOST RECENT
YEAR YEARS TEN YEARS
---- ----- ----------
<S> <C> <C> <C>
Tax-Exempt Income Fund: Class A 11.33% 7.28% 8.28%
Tax-Exempt Income Fund: Class B 10.73% 2.24%(1) N/A
</TABLE>
YIELDS
- --------------------------------------------------------------------------------
AS OF DECEMBER 31, 1995
<TABLE>
<CAPTION>
SEC 30-DAY
YIELD
-----
<S> <C>
Tax-Exempt Income Fund: Class A 4.65%
Tax-Exempt Income Fund: Class B 4.17%
</TABLE>
NOTES TO PERFORMANCE
(1) Class B shares started on January 3, 1994.
6
<PAGE> 209
WHAT HAPPENED TO A $10,000 INVESTMENT...
The charts on the right show how much a $10,000 investment in the John Hancock
Tax-Exempt Income Fund would be worth on December 31, 1995, assuming you have
been invested for the past ten years or since the day each class of shares
started and reinvested all distributions. For comparison, we've shown the same
$10,000 investment in the Lehman Brothers Municipal Bond Index -- an unmanaged
index that includes approximately 15,000 bonds and is commonly used as a measure
of bond performance.
[Tax Exempt Income Fund
Class A shares
Line chart with the heading Tax Exempt Income Fund: Class A, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines.
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $24,202 as of December 31, 1995. The second line represents the
value of the hypothetical $10,000 investment made in the Tax Exempt Income Fund
on December 31, 1985, before sales charge, and is equal to $23,212 as of
December 31, 1995. The third line represents the Tax Exempt Income Fund after
sales charge and is equal to $22,164 as of December 31, 1995.]
[Tax Exempt Income Fund
Class B shares
Line chart with the heading Tax Exempt Income Fund: Class B, representing the
growth of a hypothetical $10,000 investment over the life of the fund. Within
the chart are three lines.
The first line represents the value of the Lehman Brothers Municipal Bond Index
and is equal to $11,138 as of December 31, 1995. The second line represents the
value of the hypothetical $10,000 investment made in the Tax Exempt Income Fund
on January 3, 1994, before contingent deferred sales charge, and is equal to
$10,852 as of December 31, 1995. The third line represents the Tax Exempt Income
Fund after contingent deferred sales charge and is equal to $10,452 as of
December 31, 1995.]
7
<PAGE> 210
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
THE STATEMENT OF ASSETS AND LIABILITIES IS THE FUND'S BALANCE SHEET AND SHOWS
THE VALUE OF WHAT THE FUND OWNS, IS DUE AND OWES ON DECEMBER 31, 1995. YOU'LL
ALSO FIND THE NET ASSET VALUE PER SHARE AS OF THAT DATE.
STATEMENT OF ASSETS AND LIABILITIES
December 31, 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
ASSETS:
Investments at value - Note C:
Tax-exempt long-term bonds
(cost - $473,955,312) ................................. $ 516,930,920
Receivable for shares sold ............................... 53,251
Receivable for investments sold .......................... 561,000
Interest receivable ...................................... 11,112,667
Segregated assets for financial futures contracts ........ 112,500
Other assets ............................................. 10,445
-------------
Total Assets ........................... 528,780,783
-----------------------------------------------------------
LIABILITIES:
Temporary overdraft of cash .............................. 4,544,139
Dividend payable ......................................... 72,239
Payable for shares repurchased ........................... 348
Payable for investments purchased ........................ 19,433,358
Payable for futures variation margin - Note A ............ 23,437
Payable to John Hancock Advisers, Inc. ...................
and affiliates - Note B ................................. 255,355
Accounts payable and accrued expenses .................... 74,068
-------------
Total Liabilities ...................... 24,402,944
-----------------------------------------------------------
NET ASSETS:
Capital paid-in .......................................... 470,926,567
Accumulated net realized loss on investments
and financial futures contracts ......................... (9,352,555)
Net unrealized appreciation of investments
and financial futures contracts ......................... 42,713,108
Undistributed net investment income ...................... 90,719
-------------
Net Assets ............................. $ 504,377,839
============================================================
NET ASSET VALUE PER SHARE:
(Based on net asset values and shares of beneficial
interest outstanding - unlimited number of shares
authorized with no par value, respectively)
Class A - $495,730,615/45,056,903......................... $ 11.00
=============================================================================
Class B - $8,647,224/786,183.............................. $ 11.00
=============================================================================
MAXIMUM OFFERING PRICE PER SHARE*
Class A - ($11.00 x 104.71%).............................. $ 11.52
=============================================================================
</TABLE>
* On single retail sales of less than $100,000. On sales of $100,000 or more and
on group sales the offering price is reduced.
THE STATEMENT OF OPERATIONS SUMMARIZES THE FUND'S INVESTMENT INCOME EARNED AND
EXPENSES INCURRED IN OPERATING THE FUND. IT ALSO SHOWS NET GAINS (LOSSES) FOR
THE PERIOD STATED.
STATEMENT OF OPERATIONS
Year ended December 31, 1995
<TABLE>
<S> <C>
INVESTMENT INCOME:
Interest .................................................. $ 31,894,499
-------------
Expenses:
Investment management fee - Note B ....................... 2,683,990
Distribution/service fee - Note B
Class A ................................................ 1,445,720
Class B ................................................ 61,171
Transfer agent fee - Note B .............................. 695,061
Custodian fee ............................................ 112,143
Printing ................................................. 52,606
Trustees' fees ........................................... 46,423
Auditing fee ............................................. 40,314
Registration and filing fees ............................. 37,810
Miscellaneous ............................................ 19,493
Legal fees ............................................... 8,824
-------------
Total Expenses .......................... 5,203,555
-----------------------------------------------------------
Less Expense Reductions -
Note B .................................. (76,644)
-----------------------------------------------------------
Net Expenses ............................ 5,126,911
-----------------------------------------------------------
Net Investment Income ................... 26,767,588
-----------------------------------------------------------
REALIZED AND UNREALIZED GAIN (LOSS) ON INVESTMENTS
AND FINANCIAL FUTURES CONTRACTS:
Net realized loss on investments sold ..................... (1,285,961)
Net realized loss on financial futures contracts .......... (4,504,789)
Change in net unrealized appreciation/depreciation
of investments ........................................... 53,660,722
Change in net unrealized appreciation/depreciation
of financial futures contracts ........................... 732,812
-------------
Net Realized and Unrealized
Gain on Investments and
Financial Futures Contracts ............. 48,602,784
-----------------------------------------------------------
Net Increase in Net Assets
Resulting from Operations ............... $ 75,370,372
===========================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
8
<PAGE> 211
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
STATEMENT OF CHANGES IN NET ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994
------------- ------------
<S> <C> <C>
FROM OPERATIONS:
Net investment income ............................................................................ $ 26,767,588 $ 27,304,035
Net realized loss on investments sold and financial futures contracts ............................ (5,790,750) (3,466,027)
Change in net unrealized appreciation/depreciation of investments and financial futures contracts. 54,393,534 (55,445,616)
------------ ------------
Net Increase (Decrease) in Net Assets Resulting from Operations ............................... 75,370,372 (31,607,608)
------------ ------------
DISTRIBUTIONS TO SHAREHOLDERS:
Dividends from net investment income
Class A - ($0.5754 and $0.5664 per share, respectively) ......................................... (26,480,078) (27,204,549)
Class B ** - ($0.4931 and $0.4918 per share, respectively) ...................................... (287,510) (99,486)
Dividends from net realized gain on investments sold and financial futures contracts
Class A - (none and $0.0296 per share, respectively) ............................................ -- (1,428,226)
Class B ** - (none and $0.0296 per share, respectively) ......................................... -- (2,933)
------------ ------------
Total Distributions to Shareholders ........................................................... (26,767,588) (28,735,194)
------------ ------------
FROM FUND SHARE TRANSACTIONS-- NET* ................................................................ (15,673,735) (9,489,468)
------------ ------------
NET ASSETS:
Beginning of period .............................................................................. 471,448,790 541,281,060
------------ ------------
End of period (including undistributed net investment income of $90,719 and $2,796, respectively). $504,377,839 $471,448,790
============ ============
<FN>
* ANALYSIS OF FUND SHARE TRANSACTIONS:
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1994
--------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
CLASS A
Shares sold ...................................................... 5,088,200 $ 53,881,602 3,879,115 $ 40,764,635
Shares issued to shareholders in reinvestment of distributions ... 1,996,923 21,071,918 2,197,798 22,752,848
---------- ------------ ------------ ------------
7,085,123 74,953,520 6,076,913 63,517,483
Less shares repurchased .......................................... (8,974,201) (94,717,342) (7,437,980) (77,174,049)
---------- ------------ ------------ ------------
Net decrease ................................................... (1,889,078) $(19,763,822) (1,361,067) $(13,656,566)
========== ============ ============ ============
CLASS B**
Shares sold ...................................................... 434,135 $ 4,589,783 427,397 $ 4,462,005
Shares issued to shareholders in reinvestment of distributions ... 19,968 211,465 8,004 81,368
---------- ------------ ------------ ------------
454,103 4,801,248 435,401 4,543,373
Less shares repurchased .......................................... (67,125) (711,161) (36,196) (376,275)
---------- ------------ ------------ ------------
Net increase ................................................... 386,978 $ 4,090,087 399,205 $ 4,167,098
========== ============ ============ ============
<FN>
** Class B shares commenced operations on January 3, 1994
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
9
<PAGE> 212
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
FINANCIAL HIGHLIGHTS
Selected data for each share of beneficial interest outstanding throughout the
periods indicated, investment returns, key ratios, and supplemental data are as
follows:
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CLASS A
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period........................... $ 9.96 $ 11.21 $ 10.96 $ 11.01 $ 10.59
-------- -------- -------- -------- --------
Net Investment Income.......................................... 0.58(d) 0.57 0.58 0.63 0.68
Net Realized and Unrealized Gain (Loss) on Investments and
Financial Futures Contracts................................... 1.04 (1.22) 0.66 0.26 0.57
-------- -------- -------- -------- --------
Total from Investment Operations............................ 1.62 (0.65) 1.24 0.89 1.25
-------- -------- -------- -------- --------
Less Distributions:
Dividends from Net Investment Income.......................... (0.58) (0.57) (0.58) (0.63) (0.68)
Distributions from Net Realized Gain on Investments Sold and
Financial Futures Contracts................................. -- (0.03) (0.41) (0.31) (0.15)
-------- -------- -------- -------- --------
Total Distributions......................................... (0.58) (0.60) (0.99) (0.94) (0.83)
-------- -------- -------- -------- --------
Net Asset Value, End of Period................................. $ 11.00 $ 9.96 $ 11.21 $ 10.96 $ 11.01
======== ======== ======== ======== ========
Total Investment Return at Net Asset Value(c).................. 16.60% (5.90%) 11.53% 8.35% 12.18%
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's Omitted)...................... $495,731 $467,475 $541,281 $481,730 $422,311
Ratio of Expenses to Average Net Assets........................ 1.04% 1.11% 1.27% 1.28% 1.21%
Ratio of Net Investment Income to Average Net Assets........... 5.49% 5.43% 5.06% 5.71% 6.23%
Portfolio Turnover Rate........................................ 133% 74% 81% 93% 56%
</TABLE>
THE FINANCIAL HIGHLIGHTS SUMMARIZES THE IMPACT OF THE FOLLOWING FACTORS ON A
SINGLE SHARE FOR THE PERIOD INDICATED: NET INVESTMENT INCOME, GAINS (LOSSES),
DIVIDENDS AND TOTAL INVESTMENT RETURN OF THE FUND. IT SHOWS HOW THE FUND'S NET
ASSET VALUE FOR A SHARE HAS CHANGED SINCE THE END OF THE PREVIOUS PERIOD.
ADDITIONALLY, IMPORTANT RELATIONSHIPS BETWEEN SOME ITEMS PRESENTED IN THE
FINANCIAL STATEMENTS ARE EXPRESSED IN RATIO FORM.
SEE NOTES TO FINANCIAL STATEMENTS.
10
<PAGE> 213
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
FINANCIAL HIGHLIGHTS (continued)
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FOR THE PERIOD
JANUARY 3, 1994
(COMMENCEMENT
OF OPERATIONS)
YEAR ENDED TO DECEMBER 31,
DECEMBER 31, 1995 1994
----------------- ---------------
<S> <C> <C>
CLASS B
PER SHARE OPERATING PERFORMANCE
Net Asset Value, Beginning of Period...................................................... $ 9.95 $11.17(a)
------ ------
Net Investment Income..................................................................... 0.49(d) 0.49
Net Realized and Unrealized Gain (Loss) on Investments and Financial Futures Contracts.... 1.05 (1.19)
------ ------
Total from Investment Operations....................................................... 1.54 (0.70)
------ ------
Less Distributions:
Dividends from Net Investment Income..................................................... (0.49) (0.49)
Distributions from Net Realized Gain on Investments Sold and Financial Futures Contracts. -- (0.03)
------ ------
Total Distributions.................................................................... (0.49) (0.52)
------ ------
Net Asset Value, End of Period............................................................ $11.00 $ 9.95
====== ======
Total Investment Return at Net Asset Value(c)............................................. 15.70% (6.23%)(b)
RATIOS AND SUPPLEMENTAL DATA
Net Assets, End of Period (000's Omitted)................................................. $8,647 $3,974
Ratio of Expenses to Average Net Assets................................................... 1.82% 1.83%*
Ratio of Net Investment Income to Average Net Assets...................................... 4.70% 4.88%*
Portfolio Turnover Rate................................................................... 133% 74%
<FN>
* On an annualized basis.
(a) Initial price to commence operations.
(b) Not annualized.
(c) Total investment return assumes dividend reinvestment and does not reflect the effect of sales charges.
(d) On average month end shares outstanding.
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
11
<PAGE> 214
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
THE SCHEDULE OF INVESTMENTS IS A COMPLETE LIST OF ALL SECURITIES OWNED BY
TAX-EXEMPT INCOME FUND ON DECEMBER 31, 1995. THE TAX-EXEMPT LONG-TERM BONDS ARE
FURTHER BROKEN DOWN BY STATE. UNDER EACH STATE IS A LIST OF THE SECURITIES OWNED
BY THE FUND.
<TABLE>
SCHEDULE OF INVESTMENTS
December 31, 1995
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ---------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
ALABAMA (1.10%)
Mobile Industrial Development Board,
Solid Waste Disp Rev Ref Mobile Energy Serv Co Proj..... 6.950% 01/01/20 BBB- $ *5,250 $ 5,547,833 6.58%
-----------
ALASKA (0.50%)
Alaska Housing Finance Corp,
Ins Mtg Prog 1990 1st Ser............................... 7.750 12/01/14 A+ 1,000 1,065,590 7.27
Ins Mtg Prog 1990 1st Ser............................... 7.800 12/01/30 A+ 1,380 1,463,200 7.36
-----------
2,528,790
-----------
ARIZONA (2.88%)
Maricopa County Pollution Control Corp,
Poll Control Rev Ref Ser A Public Service Co Palo
Verde Proj ........................................... 6.375 08/15/23 BB *8,550 8,445,263 6.45
Phoenix, City of,
GO Ref Ser A............................................ 6.250 07/01/16 AA+ *2,700 3,107,052 5.43
Salt River Project Agricultural Improvement and Power
District, Salt River Proj Elec Sys Rev Ref Ser 1993C.... 5.250 01/01/19 AA 3,000 2,948,880 5.34
-----------
14,501,195
-----------
CALIFORNIA (18.49%)
Central Coast Water Auth,
Rev Regional Facil St Wtr Proj.......................... 6.350 10/01/07 AAA *2,090 2,286,126 5.81
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993...... 6.100 07/01/13 BBB- *1,000 1,020,950 5.97
Cogeneration Proj Rev Carson Ice-Gen Proj Ser 1993...... 6.200 07/01/20 BBB- 5,000 5,107,950 6.07
Duarte, City of,
Cert of Part City of Hope National Medical Center Proj.. 6.250 04/01/23 Baa1*** *1,500 1,484,325 6.32
Foothill/Eastern Transportation Corridor Agency,
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A............. Zero 01/01/19 BBB- *36,600 8,629,914 6.38
Toll Rd Rev Fixed Rate Cap Apprec Ser 1995A............. Zero 01/01/20 BBB- *10,000 2,214,300 6.38
Toll Rd Rev Fixed Rate Current Int Ser 1995A............ 6.000 01/01/16 BBB- *13,500 13,550,760 5.98
Hawaiian Gardens Redevelopment Agency,
Tax Alloc Ref Proj No 1................................. 6.200 12/01/23 BBB *3,000 3,004,830 6.19
Los Angeles, County of,
Cert of Part Civic Center Heating & Refrigeration Plant
Proj ................................................... 8.000 06/01/10 A 1,000 1,107,630 7.22
Madera, County of,
Cert of Part Valley Children's Hosp Proj................ 6.500 03/15/15 AAA *13,185 15,162,882 5.65
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
12
<PAGE> 215
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ---------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
CALIFORNIA (CONTINUED)
Metropolitan Water District,
Southern Calif Waterworks Rev Ser A..................... 5.500% 07/01/25 AAA $*11,000 $11,074,580 5.46%
Southern Calif Waterworks Rev Reg Inverse Floater....... 7.560# 08/05/22 AA *5,000 5,212,500 7.25
Sacramento Power Auth,
Rev 1995 Ser Cogeneration Proj.......................... 6.000 07/01/22 BBB- *5,000 4,988,800 6.01
San Bernardino, County of,
Cert of Part Ser 1994 Medical Center Fin Proj........... 5.500 08/01/17 A- *9,130 8,740,514 5.75
Cert of Part Ser 1994 Medical Center Fin Proj........... 5.500 08/01/22 A- *2,500 2,363,275 5.82
San Joaquin Hills Transportation Corridor Agency,
Toll Rd Rev Jr Lien Cap Apprec.......................... Zero 01/01/28 BBB*** *1,550 147,777 7.48
Toll Rd Rev Sr Lien..................................... 5.000 01/01/33 BBB*** *1,435 1,228,274 5.84
Toll Rd Rev Sr Lien Cap Apprec.......................... Zero 01/01/14 BBB*** *5,000 1,656,650 5.97
Toll Rd Rev Sr Lien Cap Apprec.......................... Zero 01/01/21 BBB*** *375 78,934 6.33
Toll Rd Rev Sr Lien Cap Apprec.......................... Zero 01/01/22 BBB*** *5,000 988,850 6.33
Toll Rd Rev Sr Lien Conv Cap Apprec..................... Zero 01/01/05 BBB*** *2,500 1,837,075 3.45
Southern California Public Power Auth,
Rev Elec Pwr & Light Imp................................ 6.750 07/01/11 A *1,195 1,383,547 5.83
-----------
93,270,443
-----------
COLORADO (2.17%)
Arapahoe County Capital Improvement Trust Fund,
Highway Rev Current Ser E-470........................... 6.950 08/31/20 Baa*** *5,000 5,416,750 6.42
Denver, City and County of,
Airport Sys Rev Ser 1992A............................... 7.250 11/15/25 BBB *5,000 5,512,400 6.58
-----------
10,929,150
-----------
CONNECTICUT (0.38%)
Connecticut State Health and Educational Facilities Auth,
Rev Ser D Quinnipiac College Iss........................ 6.000 07/01/23 BBB- 2,000 1,889,700 6.35
-----------
DELAWARE (0.99%)
Delaware State Economic Development Auth,
Rev Ref Poll Control Ser B Delmarva Pwr Proj............ 6.750 05/01/19 AAA *4,500 4,973,175 6.11
-----------
FLORIDA (3.60%)
Broward, County of,
Resource Recovery Rev Ser 1984 Ses Broward Co. L.P.
South Proj ............................................ 7.950 12/01/08 A 4,445 5,030,051 7.03
Florida, State of,
Sunshine Skyway Rev Ser of 1984......................... 10.250 06/01/10 AAA 1,250 1,385,087 9.25
Hillsborough, County of,
Ref Util Rev Ser 1991A.................................. 7.000 08/01/14 BBB+ 1,245 1,343,990 6.48
Orlando Utilities Commission,
Wtr & Elec Sub Rev Ser 1989D............................ 6.750 10/01/17 AA- 2,200 2,650,626 5.60
Palm Beach, County of,
Solid Waste Ind'l Dev Rev Ser 1993A Okeelanta Pwr Lp
Proj .................................................. 6.850 02/15/21 BBB-*** 7,500 7,728,825 6.65
-----------
18,138,579
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
13
<PAGE> 216
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ---------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
GEORGIA (1.22%)
Georgia Municipal Electric Auth,
Pwr Rev Ref Ser BB...................................... 5.700% 01/01/19 A $ *1,000 $ 1,029,890 5.53%
Pwr Rev Ser M........................................... 8.375 01/01/20 A 1,000 1,059,560 7.90
Municipal Electric Auth,
Spec Oblig 5th Crossover Proj 1......................... 6.500 01/01/17 AAA *3,500 4,072,390 5.59
-----------
6,161,840
-----------
ILLINOIS (4.09%)
Chicago, City of,
Chicago-O'Hare Int'l Airport Gen Airport Rev 1990 Ser A. 7.500 01/01/16 A+ 2,000 2,207,680 6.79
Chicago-O'Hare Int'l Airport Int'l Terminal Spec Rev
Ser 1992 .............................................. 6.750 01/01/12 AAA 3,000 3,269,940 6.19
Chicago-O'Hare Int'l Airport Spec Facil Rev Ser 1990A
American Airlines Proj................................ 7.875 11/01/25 BB+ 3,000 3,273,960 7.22
Chicago-O'Hare Int'l Airport Spec Facil Rev Ser 1992
Delta Airlines Terminal Proj.......................... 6.450 05/01/18 BB *3,000 3,075,390 6.29
Illinois Development Finance Auth,
Poll Control Rev Ref Commonwealth Edison Co Proj........ 5.850 01/15/14 BBB *3,000 2,902,590 6.05
Rev Cap Apprec Lockport School District Proj............ Zero 01/01/14 AAA *5,650 2,157,791 5.42
Rev Cap Apprec Lockport School District Proj............ Zero 01/01/15 AAA *5,935 2,147,877 5.42
Illinois Health Facilities Auth,
Rev Ref Ser 1992 Mercy Hosp & Medical Center Proj....... 7.000 01/01/07 A- 1,500 1,606,725 6.54
-----------
20,641,953
-----------
INDIANA (0.20%)
Indianapolis Airport Auth,
Spec Facil Rev Ser A United Airlines Proj............... 6.500 11/15/31 BB *1,000 1,022,330 6.36
-----------
KANSAS (0.47%)
Johnson County Water District No. 1,
Wtr Rev Ref Ser 1984.................................... 10.500 12/01/08 AAA 2,000 2,351,720 8.93
-----------
KENTUCKY (1.52%)
Kenton County Airport Board,
Rev Spec Facil Delta Airlines Proj Ser 1992A............ 6.750 02/01/02 BB 2,000 2,128,820 6.34
Rev Spec Facil Delta Airlines Proj Ser 1992A............ 7.500 02/01/12 BB 2,000 2,156,560 6.96
Rev Spec Facil Delta Airlines Proj Ser 1992A............ 7.125 02/01/21 BB *2,000 2,114,840 6.74
Owensboro Electric Light and Power Co,
Rev Deferred Int Ser B.................................. Zero 01/01/19 AAA *4,400 1,258,356 5.42
-----------
7,658,576
-----------
LOUISIANA (1.57%)
Louisiana Public Facilities Auth,
Rev Ser B Alton Ochsner Medical Funding Proj............ 6.500 05/15/22 AAA *3,405 3,668,377 6.03
St. Charles, Parish of,
Poll Control Rev Ser 1991 Louisiana Pwr & Light Co Proj. 7.500 06/01/21 BBB 4,000 4,227,480 7.10
-----------
7,895,857
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
14
<PAGE> 217
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ---------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
MARYLAND (0.68%)
Baltimore, City of,
Rev Ref Ser A Wtr Proj.................................. 5.000% 07/01/24 AAA $*3,500 $ 3,442,530 5.08%
-----------
MASSACHUSETTS (9.27%)
Massachusetts Bay Transportation Auth,
Gen Trans Sys 1990 Ser B................................ 7.875 03/01/21 AAA 2,000 2,363,420 6.66
Massachusetts Health and Educational Facilities Auth,
Rev Brigham & Women's Hosp Iss Ser D.................... 6.750 07/01/24 A+ 2,450 2,609,642 6.34
Rev Harvard Univ Iss Ser P.............................. 5.375 11/01/32 AAA *9,670 9,630,740 5.40
Rev Lowell Gen Hosp Iss Ser A........................... 8.400 06/01/11 Baa1*** 1,100 1,223,024 7.56
Rev New England Deaconess Hosp Iss Ser D................ 6.625 04/01/12 A 3,500 3,658,900 6.34
Rev New England Deaconess Hosp Iss Ser D................ 6.875 04/01/22 A 7,960 8,365,005 6.54
Rev New England Medical Center Hosp Iss Ser E........... 7.875 07/01/11 A- 1,950 2,157,343 7.12
Rev Worcester Polytechnic Institute Ser E............... 6.750 09/01/11 A+ 2,000 2,243,280 6.02
Massachusetts Housing Finance Agency,
Residential Dev 1992 Ser A.............................. 6.900 11/15/24 AAA 2,700 2,859,759 6.51
Single Family Hsg Ser 8................................. 7.700 06/01/17 A+ 1,500 1,608,000 7.18
Massachusetts Municipal Wholesale Electric Co,
Pwr Supply Sys Rev 1992 Ser B A Pub Corp of The
Commonwealth of Mass .................................. 6.750 07/01/17 BBB+ 4,405 4,812,727 6.18
Massachusetts, Commonwealth of,
GO Consol Loans of 1994 Ser B........................... 6.000 08/01/14 A+ 2,000 2,120,560 5.66
Plymouth, County of,
Cert of Part Ser A Plymouth County Correctional Facil
Proj .................................................. 7.000 04/01/22 A- 2,750 3,087,645 6.23
------------
46,740,045
------------
MICHIGAN (2.91%)
Detroit, City of,
Sewage Disposal Rev Ser 1993 Linked Pars & Inflos....... 7.116# 07/01/23 AAA *2,000 2,060,000 6.91
Michigan State Hospital Finance Auth,
Hosp Rev Ref Ser 1995A Genesys Hlth Sys Oblig Group..... 8.100 10/01/13 BBB *4,250 4,747,675 7.25
Hosp Rev Ref Sinai Hospital Proj........................ 6.700 01/01/26 Baa*** *2,500 2,524,625 6.63
Wayne Charter County of,
Spec Airport Facil Rev Ref Ser 1995 Northwest Airlines
Facil ................................................. 6.750 12/01/15 BB+*** *5,200 5,359,900 6.55
------------
14,692,200
------------
MISSISSIPPI (0.03%)
Mississippi Home Corp,
Single Family Sr Rev Ref Ser 1990A...................... 9.250 03/01/12 AAA 130 142,418 8.44
------------
NEBRASKA (0.27%)
Omaha Public Power District,
Elec Sys Rev 1992 Ser B................................. 6.200 02/01/17 AA 1,200 1,360,860 5.47
------------
NEW JERSEY (0.47%)
New Jersey Turnpike Auth,
Turnpike Rev Ser 1984................................... 10.375 01/01/03 AAA 1,900 2,377,204 8.29
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
15
<PAGE> 218
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ---------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
NEW YORK (12.70%)
Metropolitan Transportation Auth,
Transit Facil 1987 Serv Contract Ser 1.................. 8.500% 07/01/17 AAA $ 1,000 $ 1,087,970 7.81%
New York City Industrial Development Agency,
Solid Waste Disposal Rev 1995 Visy Paper NY Inc Proj**.. 7.950 01/01/28 BB*** *3,250 3,317,502 7.79
New York Local Government Assistance Corp,
Ser 1992 A Pub Benefit Corp............................. 6.875 04/01/19 A 8,700 9,758,877 6.13
New York State Dormitory Auth,
City Univ Ref Iss 1988B................................. 8.125 07/01/08 BBB 1,000 1,109,690 7.32
Cornell Univ Rev Ser 1990A.............................. 7.375 07/01/30 AA 1,000 1,125,880 6.55
State Univ Ed Facil Rev Iss Ser 1990B................... 7.500 05/15/11 BBB+ 500 608,115 6.17
New York State Energy Research and Development Auth,
Elec Facil Rev Ser 1990 A Long Island Lighting Co Proj.. 7.150 06/01/20 BB+ 6,000 6,164,580 6.96
Elec Facil Rev Ser 1991 A Consol Edison Co of NY Inc
Proj .................................................. 7.500 01/01/26 A+ 2,000 2,185,240 6.86
New York State Environmental Facilities Corp,
State Wtr Poll Control Revolving Fund Rev Ser 1990 A.... 7.500 06/15/12 A 3,770 4,212,749 6.71
New York State Housing Finance Agency,
State Univ Construction Ref 1986 Ser A.................. 8.000 05/01/11 AAA 2,000 2,566,840 6.23
New York State Medical Care Facilities Finance Agency,
Mental Hlth Serv Facil Imp Rev 1990 Ser B............... 7.875 08/15/08 BBB+ 500 559,595 7.04
Mental Hlth Serv Facil Imp Rev 1990 Ser B............... 7.875 08/15/20 BBB+ 460 518,871 6.98
Mental Hlth Serv Facil Imp Rev 1991 Ser A............... 7.750 08/15/11 BBB+ 540 610,319 6.86
Mental Hlth Serv Facil Imp Rev 1991 Ser A............... 7.750 08/15/11 AAA 1,460 1,719,617 6.58
New York State Mortgage Agency,
Homeowner Mtg Rev Ser BB-2.............................. 7.950 10/01/15 AA*** 1,135 1,197,697 7.53
New York State Power Auth,
Gen Purpose Ser V....................................... 7.875 01/01/13 AAA 2,400 2,627,736 7.19
Gen Purpose Ser V....................................... 8.000 01/01/17 AA 1,850 2,027,692 7.30
New York, City of,
GO Fiscal 1991 Ser D.................................... 8.000 08/01/04 BBB+ 250 285,718 7.00
GO Fiscal 1991 Ser F.................................... 8.200 11/15/03 BBB+ 1,250 1,451,587 7.06
GO Fiscal 1992 Ser A.................................... 7.750 08/15/12 BBB+ 2,000 2,262,100 6.85
GO Fiscal 1992 Ser D.................................... 7.700 02/01/09 BBB+ 1,000 1,131,000 6.81
GO Fiscal 1992 Ser H.................................... 7.000 02/01/08 BBB+ 2,000 2,178,140 6.43
GO Fiscal 1993 Ser D.................................... 5.750 08/15/13 BBB+ *3,170 3,097,724 5.88
GO Fiscal 1995 Ser B.................................... 7.000 08/15/16 BBB+ 3,000 3,289,680 6.38
GO Fiscal 1996 Ser G**.................................. 6.750 02/01/09 BBB+ *2,500 2,710,775 6.23
Triborough Bridge and Tunnel Auth,
Gen Purpose Rev Ser L................................... 8.125 01/01/12 A+ 1,750 1,917,265 7.42
Gen Purpose Rev Ser R................................... 7.375 01/01/16 AAA 1,600 1,810,880 6.52
Spec Oblig Ref Ser 1991B................................ 6.875 01/01/15 A- 2,300 2,531,265 6.25
-----------
64,065,104
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
16
<PAGE> 219
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ---------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
NORTH CAROLINA (4.13%)
North Carolina Eastern Municipal Power Agency,
Pwr Sys Rev Ref Ser 1991A............................... 5.750% 01/01/19 BBB+ $*4,000 $ 3,910,200 5.88%
Pwr Sys Rev Ref Ser 1993C............................... 5.000 01/01/21 BBB+ *5,000 4,463,350 5.60
North Carolina Municipal Power Agency Number 1,
Catawba Elec Rev Ser 1992............................... 5.750 01/01/15 AAA *7,410 7,410,000 5.75
Catawba Elec Rev Ser 1993............................... 5.000 01/01/15 AAA *5,220 5,033,855 5.18
-----------
20,817,405
-----------
OHIO (5.72%)
Cleveland Public Power System,
Elec Sys Rev 1st Mtg Ser A.............................. 7.000 11/15/24 AAA 6,200 7,213,328 6.02
Franklin, County of,
Hosp Facil Ref & Imp Rev Ser 1990B Riverside United
Methodist Hosp Proj ................................... 7.600 05/15/20 AAA 1,000 1,152,150 6.60
Lorain, County of,
Rev 1st Mtg Ser A Kendal At Oberlin Proj................ 8.625 02/01/22 BBB-*** *3,600 3,978,288 7.80
Ohio State Air Quality Development Auth,
Rev Adj Ser B Columbus & South Proj..................... 6.250 12/01/20 Baa2*** *4,500 4,477,230 6.28
Ohio State Water Development Auth,
Poll Control Facil Rev Ref Ser 1989A Ohio Edison Co Proj 7.625 07/01/23 BB+ *8,390 9,037,205 7.08
Poll Control Facil Rev Ref Ser 1995 Cleveland Elec Co
Proj .................................................. 7.700 08/01/25 BB *2,800 3,004,232 7.18
-----------
28,862,433
-----------
OKLAHOMA (0.81%)
Oklahoma Turnpike Auth,
Turnpike Sys 1st Sr Rev Ser 1989........................ 7.875 01/01/21 A+ 1,745 1,958,274 7.02
Tulsa Municipal Airport Trust, Trustees of,
Rev Ser 1988 American Airlines Inc...................... 7.375 12/01/20 BB+ 2,000 2,148,140 6.87
-----------
4,106,414
-----------
OREGON (1.00%)
Western Generation Agency,
Rev 1994 Ser A Wauna Cogeneration Proj.................. 7.125 01/01/21 BB-*** 4,800 5,059,440 6.76
-----------
PENNSYLVANIA (8.95%)
Allegheny County Industrial Development Auth,
Rev Ref Ser 1994A Environmental Imp USX Corp Proj....... 6.700 12/01/20 BB+ 5,000 5,201,200 6.44
Beaver County Industrial Development Auth,
Coll Poll Control Rev Ref Ser 1995A Toledo Edison Co
Beaver Valley Proj ..................................... 7.750 05/01/20 BB *7,500 8,116,500 7.16
Delaware County Industrial Development Auth,
Poll Control Rev Ref 1991 Ser A Philadelphia Elec Co
Proj .................................................. 7.375 04/01/21 BBB+ 6,095 6,631,421 6.78
Exeter Township School District,
GO Cap Apprec Ser 1994**................................ Zero 05/15/16 AAA *3,785 1,269,338 5.43
Pennsylvania Convention Center Auth,
Rev Ref Ser 1994A....................................... 6.700 09/01/14 BBB- 4,950 5,436,189 6.10
Pennsylvania Economic Development Finance Auth,
Resource Recovery Rev Ser 1994D Colver Proj............. 7.125 12/01/15 BBB- 7,000 7,571,340 6.59
Pennsylvania State Turnpike Commission,
Turnpike Rev Ser N...................................... 6.500 12/01/13 AAA 2,840 3,061,832 6.03
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
17
<PAGE> 220
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ---------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
PENNSYLVANIA (CONTINUED)
Philadelphia Industrial Development Auth,
Commercial Development Rev Ser 1995 Philadelphia Airport
Hotel Proj ............................................ 7.750% 12/01/17 B+*** $ *3,250 $ 3,398,330 7.41%
Westmoreland County Municipal Auth,
Municipal Serv Rev Cap Apprec Ser C..................... Zero 08/15/17 AAA *10,880 3,350,931 5.52
York County Solid Waste and Refuse Auth,
Adj Tender Ind'l Dev Rev Ser of 1985 Resource Recovery
Proj .................................................. 8.200 12/01/14 AA- 1,000 1,090,600 7.52
-----------
45,127,681
-----------
PUERTO RICO (1.75%)
Puerto Rico Highway and Transportation Auth,
Highway Rev Ref Ser W................................... 5.500 07/01/13 A *5,000 5,095,950 5.40
Puerto Rico Public Building Auth,
Gtd Rev Gov't Facil Ser A............................... 6.250 07/01/14 AAA *2,195 2,492,203 5.50
Gtd Rev Gov't Facil Ser A............................... 6.250 07/01/15 AAA *1,100 1,253,681 5.48
-----------
8,841,834
-----------
SOUTH CAROLINA (1.13%)
Piedmont Municipal Power Agency,
Rev Ref South Carolina Elec Sys......................... 5.375 01/01/25 AAA *3,000 3,055,530 5.28
South Carolina Public Service Auth,
Santee Cooper Elec Sys Exp Rev Ref 1988 Ser A........... 7.875 07/01/21 A+ 2,615 2,667,901 7.72
-----------
5,723,431
-----------
SOUTH DAKOTA (0.20%)
South Dakota Health and Educational Facilities Auth,
Rev Ser 1989 Sioux Valley Hosp Iss...................... 7.625 11/01/13 AA- 925 1,029,812 6.85
-----------
TENNESSEE (2.74%)
Maury County Industrial Development Board,
Multi-Modal Interchangeable Rate Poll Control Ref Rev
Saturn Corp Proj ...................................... 6.500 09/01/24 A- *9,000 9,576,270 6.11
Memphis-Shelby County Airport Auth,
Rev Ref Federal Express Corp............................ 6.750 09/01/12 BBB 4,000 4,266,920 6.33
-----------
13,843,190
-----------
TEXAS (3.94%)
Brazos River Auth,
Coll Rev Ref Ser 1988B Houston Lighting & Pwr Co Proj... 8.250 05/01/15 A 2,000 2,178,620 7.57
Dallas-Fort Worth International Airport,
Rev Delta Air Lines Inc................................. 7.600 11/01/11 BB 3,000 3,243,240 7.03
Spec Facil Rev American Airlines Inc.................... 7.250 11/01/12 BB+ *1,900 1,900,133 7.25
Harris County Health Facilities Development Corp,
Hosp Rev Ser 1988A Saint Luke's Episcopal Hosp Proj..... 8.250 02/15/08 AAA 1,000 1,152,770 7.16
Texas Turnpike Auth,
Dallas North Thruway Rev Ref Ser 1996**................. 5.000 01/01/10 AAA *7,000 6,597,640 5.30
Dallas North Thruway Rev Ref Ser 1996**................. 5.500 01/01/15 AAA *5,000 4,775,550 5.76
-----------
19,847,953
-----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
18
<PAGE> 221
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
<TABLE>
<CAPTION>
PAR VALUE YIELD
INTEREST MATURITY S&P (000'S MARKET AT
STATE, ISSUER, DESCRIPTION RATE DATE RATING**** OMITTED) VALUE MARKET+
- -------------------------- ---- ---- ---------- -------- ----- -------
<S> <C> <C> <C> <C> <C> <C>
WASHINGTON (5.70%)
Port of Walla Walla Public Corp,
Solid Waste Recycling Rev Ser 1995 Ponderosa Fibres Proj 9.125% 01/01/26 BB-*** $*11,000 $ 11,385,330 8.82%
Seattle, City of,
Municipal Light & Pwr Rev 1994.......................... 6.625 07/01/16 AA 3,600 3,969,323 6.01
Washington Public Power Supply System,
Nuclear Proj No. 1 Ref Rev Ser 1989A.................... 7.500 07/01/15 AA 1,455 1,605,505 6.80
Nuclear Proj No. 1 Ref Rev Ser 1989B.................... 7.125 07/01/16 AA 1,500 1,770,720 6.04
Nuclear Proj No. 1 Ref Rev Ser 1991A.................... 6.875 07/01/17 AA 1,250 1,366,087 6.29
Nuclear Proj No. 2 Ref Rev Ser 1990C.................... 7.625 07/01/10 AAA 5,000 5,834,700 6.53
Nuclear Proj No. 3 Ref Rev Ser 1989B.................... 7.250 07/01/15 AAA 2,500 2,817,800 6.43
------------
28,749,465
------------
WISCONSIN (0.91%)
Wisconsin Public Power Inc,
Pwr Supply Sys Rev Ser 1990A............................ 7.400 07/01/20 AAA 4,000 4,590,360 6.45
------------
TOTAL TAX-EXEMPT LONG-TERM BONDS
(Cost $473,955,312) (102.49%) $516,930,920
======== ============
</TABLE>
NOTES TO SCHEDULE OF INVESTMENTS
* Securities other than short-term investments, newly added to the portfolio,
during the period ended December 31, 1995.
** These securities having an aggregate value of $18,670,805 or 3.70% of the
Fund's net asset value, have been purchased as forward commitments -- that
is, the Fund has agreed on the trade date, to take delivery of and make
payment for such securities on a delayed basis subsequent to the date of
this schedule. The purchase price and interest rate of such securities is
fixed at trade date, although the Fund does not earn any interest on such
securities until settlement date. The Fund has instructed its Custodian
Bank to segregate assets with the current value at least equal to the
amount of its forward commitment. Accordingly, the market values of
$6,631,421 of Delaware County Industrial Development Finance Auth, Poll
Control Rev Ref 1991 Ser A Philadelphia Elec Co, 7.375%, 04-01-21,
$14,605,127 of Madera, County of, Cert of Part Valley Children's Hosp Proj,
6.500%, 03-15-15, and $1,406,106 of Pennsylvania Economic Development
Finance Auth, Resource Recovery Rev Ser 1994D Colver Proj, 7.125%,
12-01-15, has been segregated to cover the forward commitments.
*** Credit Ratings are rated by Moody's Investors Services, Fitch or John
Hancock Advisers, Inc. where Standard & Poor's ratings are not available.
**** Credit ratings are unaudited.
NR Not rated.
+ The yield is not calculated in accordance with guidelines established by
the U.S. Securities Exchange Commission and is unaudited. Zero coupon
yields are at yield to maturity.
# Represents rate in effect on December 31, 1995.
The percentages shown for each investment category is the total value of that
category as a percentage of the net assets of the Fund.
SEE NOTES TO FINANCIAL STATEMENTS.
19
<PAGE> 222
FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
THE TAX-EXEMPT INCOME FUND INVESTS PRIMARILY IN SECURITIES ISSUED BY THE VARIOUS
STATES AND THEIR VARIOUS POLITICAL SUBDIVISIONS. THE PERFORMANCE OF THE FUND IS
CLOSELY TIED TO ECONOMIC CONDITIONS WITHIN THE APPLICABLE STATES AND THE
FINANCIAL CONDITION OF THE STATES AND THEIR AGENCIES AND MUNICIPALITIES. THE
CONCENTRATION OF INVESTMENTS BY STATES AND CREDIT RATINGS FOR INDIVIDUAL
SECURITIES HELD BY THE FUND ARE SHOWN IN THE SCHEDULE OF INVESTMENTS. IN
ADDITION, THE CONCENTRATION OF INVESTMENTS CAN BE AGGREGATED BY VARIOUS SECTOR
CATEGORIES.
THE TABLE BELOW SHOWS THE PERCENTAGES OF THE FUND'S INVESTMENTS AT DECEMBER 31,
1995 ASSIGNED TO THE VARIOUS SECTOR CATEGORIES.
<TABLE>
PORTFOLIO CONCENTRATION
- -----------------------------------------------------------------------------------------------------
<CAPTION>
MARKET VALUE AS A PERCENTAGE OF
SECTOR DISTRIBUTION THE FUND'S NET ASSETS:
- ------------------- ----------------------
<S> <C>
General Obligation ................................................ 4.29%
Revenue Bonds - Certificate of Participation ...................... 0.91
Revenue Bonds - Education ......................................... 3.95
Revenue Bonds - Electric Power .................................... 20.74
Revenue Bonds - Health ............................................ 13.05
Revenue Bonds - Housing ........................................... 2.95
Revenue Bonds - Industrial Development Bond ....................... 7.41
Revenue Bonds - Other ............................................. 4.92
Revenue Bonds - Pollution Control Facilities ...................... 17.05
Revenue Bonds - Transportation .................................... 20.21
Revenue Bonds - Water & Sewer ..................................... 7.01
------
TOTAL TAX-EXEMPT LONG-TERM BONDS 102.49%
======
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
20
<PAGE> 223
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
NOTE A --
ACCOUNTING POLICIES
John Hancock Tax-Exempt Income Fund (the "Fund") is a diversified open-end
investment management company registered under the Investment Company Act of
1940. The investment objective of the Fund is to provide as high a level of
dividend income exempt from Federal income tax as is consistent with
preservation of capital and the Fund's requirements for liquidity.
The Trustees have authorized the issuance of two classes of the Fund,
designated as Class A and Class B. The shares of each class represent an
interest in the same portfolio of investments of the Fund and have equal rights
to voting, redemption, dividends and liquidation, except that certain expenses,
subject to the approval of the Trustees, may be applied differently to each
class of shares in accordance with current regulations of the Securities and
Exchange Commission and the Internal Revenue Service. Shareholders of a class
which bears distribution/service expenses under the terms of a distribution
plan, have exclusive voting rights regarding such distribution plan. Class A
shares are subject to an initial sales charge of up to 4.50% and a 12b-1
distribution plan. Class B shares are subject to a contingent deferred sales
charge and a separate 12b-1 distribution plan. Significant accounting policies
of the Fund are as follows:
VALUATION OF INVESTMENTS Securities in the Fund's portfolio are valued on the
basis of market quotations, valuations provided by independent pricing services
or, at fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within 60 days
are valued at amortized cost which approximates market value.
JOINT REPURCHASE AGREEMENT Pursuant to an exemptive order issued by the
Securities and Exchange Commission, the Fund, along with other registered
investment companies having a management contract with John Hancock Advisers,
Inc. (the "Adviser"), a wholly-owned subsidiary of The Berkeley Financial Group,
may participate in a joint repurchase agreement transaction. Aggregate cash
balances are invested in one or more repurchase agreements, whose underlying
securities are obligations of the U.S. government and/or its agencies. The
Fund's custodian bank receives delivery of the underlying securities for the
joint account on the Fund's behalf. The Adviser is responsible for ensuring that
the agreement is fully collateralized at all times.
FINANCIAL FUTURES CONTRACTS The Fund may buy and sell financial futures
contracts to hedge against the effects of fluctuations in interest rates and
other market conditions. At the time the Fund enters into a financial futures
contract, it will be required to deposit with its custodian a specified amount
of cash or U.S. government securities, known as "initial margin", equal to a
certain percentage of the value of the financial futures contract being traded.
Each day, the futures contract will be valued at the official settlement price
of the board of trade or U.S. commodities exchange. Subsequent payments, known
as "variation margin", to and from the broker will be made on a daily basis as
the market price of the financial futures contract fluctuates. Daily variation
margin adjustments, arising from this "mark to market", will be recorded by the
Fund as unrealized gains or losses.
When the contracts are closed, the Fund will recognize a gain or loss. Risks
of entering into futures contracts include the possibility that there may be an
illiquid market and/or that a change in the value of the contracts may not
correlate with changes in the value of the underlying securities. In addition,
the Fund could be prevented from opening, or realizing the benefits of closing
out, futures positions because of position limits or limits on daily price
fluctuations imposed by an exchange.
For Federal income tax purposes, the amount, character and timing of the
Fund's gains and/or losses can be affected as a result of futures contracts.
At December 31, 1995, open positions in financial futures contracts were as
follows:
<TABLE>
<CAPTION>
UNREALIZED
EXPIRATION OPEN CONTRACTS POSITION DEPRECIATION
- ---------- -------------- -------- ------------
<S> <C> <C> <C>
MAR 1996 75 Muni Bond Index SHORT $(262,500)
=========
</TABLE>
At December 31, 1995, the Fund has deposited in a segregated account $112,500
to cover margin requirements on open financial futures contracts.
INVESTMENT TRANSACTIONS Investment transactions are recorded as of the date of
purchase, sale or maturity. Net realized gains and losses on sales of
investments are determined on the identified cost basis.
21
<PAGE> 224
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
PREMIUM AND DISCOUNT For tax-exempt issues, the Fund amortizes the amount paid
in excess of par value on securities purchased from either the date of purchase
or date of issue to date of sale, maturity or to next call date, if applicable.
The Fund accretes original issue discount from par value on securities purchased
from either the date of issue or the date of purchase over the life of the
security, as required by the Internal Revenue Code. The Fund records market
discount on bonds purchased after April 30, 1993 at the time of disposition.
FEDERAL INCOME TAXES The Fund's policy is to comply with the requirements of the
Internal Revenue Code that are applicable to regulated investment companies and
to distribute all of its taxable income, including any net realized gain on
investment, to its shareholders. Therefore, no federal income tax provision is
required. For federal income tax purposes, the Fund has $8,110,320 of capital
loss carryforwards available, to the extent provided by regulations, to offset
future net realized capital gains. If such carryforwards are used by the Fund,
no capital gain distributions will be made. The carryforwards expire as follows:
December 31, 2002 -- $2,374,664 and December 31, 2003 -- $5,735,656.
DIVIDENDS, DISTRIBUTIONS, AND INTEREST Interest income on investment securities
is recorded on the accrual basis.
The Fund records all distributions to shareholders from net investment income
and realized gains on the ex-dividend date. Such distributions are determined in
conformity with income tax regulations, which may differ from generally accepted
accounting principles. Dividends paid by the Fund, if any, with respect to each
class of shares will be calculated in the same manner, at the same time and will
be in the same amount, except for the effect of expenses that may be applied
differently to each class as explained previously.
CLASS ALLOCATIONS Income, common expenses and realized and unrealized gains
(losses) are determined at the Fund level and allocated daily to each class of
shares based on the appropriate net assets of the respective classes.
Distribution/service fees, if any, are calculated daily at the class level based
on the appropriate net assets of each class and the specific expense rate(s)
applicable of each class.
NOTE B --
MANAGEMENT FEE AND TRANSACTIONS WITH AFFILIATES AND OTHERS
Under the present investment management contract, the Fund pays a monthly
management fee to the Adviser for a continuous investment program equivalent, on
an annual basis, to the sum of: (a) 0.55% of the first $500,000,000 of the
Fund's average daily net asset value, (b) 0.50% of the next $500,000,000, and
(c) 0.45% of the Fund's average daily net asset value in excess of
$1,000,000,000.
In the event normal operating expenses of the Fund, exclusive of certain
expenses prescribed by state law, are in excess of the most restrictive state
limit where the Fund is registered to sell shares, the fee payable to the
Adviser will be reduced to the extent of such excess, and the Adviser will make
additional arrangements necessary to eliminate any remaining excess expenses.
The current limits are 2.5% of the first $30,000,000 of the Fund's average daily
net asset value, 2.0% of the next $70,000,000, and 1.5% of the remaining average
daily net asset value. $76,644 of custodian fees have been reduced by balance
credits applied during the period ended December 31, 1995.
The Fund has a distribution agreement with John Hancock Funds, Inc. ("JH
Funds"), a wholly-owned subsidiary of the Adviser. For the period ended December
31, 1995, JH Funds received net sales charges on sales of Class A shares of the
Fund in the amount of $779,270. Out of this amount, $90,638 was retained and
used for printing prospectuses, advertising, sales literature and other
purposes, $52,648 was paid as sales commissions and service fees to unrelated
broker-dealers and $635,984 was paid as sales commissions and service fees to
sales personnel of John Hancock Distributors, Inc. ("Distributors"), Tucker
Anthony, Incorporated ("Tucker Anthony") and Sutro & Co., Inc. ("Sutro"). The
Adviser's indirect parent, John Hancock Mutual Life Insurance Company, is the
indirect sole shareholder of Distributors and John Hancock Freedom Securities
Corporation and its subsidiaries, which include Tucker Anthony and Sutro, all of
which are broker-dealers.
Class B shares which are redeemed within six years of purchase will be
subject to a contingent deferred sales charge ("CDSC") at declining rates
beginning at 5.0% of the lesser of the current market value
22
<PAGE> 225
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
at the time of redemption or the original purchase cost of the shares being
redeemed. Proceeds from CDSC are paid to JH Funds and are used in whole or in
part to defray its expenses related to providing distribution related services
to the Fund in connection with the sale of Class B shares. For the period ended
December 31, 1995, contingent deferred sales charges received by JH Funds
amounted to $16,759.
In addition, to compensate JH Funds for the services it provides as
distributor of shares of the Fund, the Fund has adopted Distribution Plans with
respect to Class A and Class B shares pursuant to Rule 12b-1 under the
Investment Company Act of 1940. Accordingly, the Fund will make payments to JH
Funds for distribution and service expenses at an annual rate not to exceed
0.30% of Class A average daily net assets and 1.00% of Class B average daily net
assets to reimburse JH Funds for its distribution and service costs. Up to a
maximum of 0.25% of these payments may be service fees as defined by the amended
Rules of Fair Practice of the National Association of Securities Dealers. Under
the amended Rules of Fair Practice, curtailment of a portion of the Fund's 12b-1
payments could occur under certain circumstances.
The Fund has a transfer agent agreement with John Hancock Investor Services
Corporation ("Investor Services"), a wholly-owned subsidiary of The Berkeley
Financial Group. Prior to October 1, 1995, the Fund paid transfer agent fees as
a class specific expense based on the number of shareholder accounts and certain
out-of-pocket expenses. For the nine months ended September 30, 1995 the
transfer expense, calculated as a class specific expense, was $567,657 for Class
A and $12,261 for Class B, respectively. Effective October 1, 1995, transfer
agent expense is a fund expense.
Messrs. Edward J. Boudreau, Jr. and Richard S. Scipione are directors and/or
officers of the Adviser, and/or its affiliates as well as Trustees of the Fund.
The compensation of unaffiliated Trustees is borne by the Fund. Effective with
the fees paid for 1995, the unaffiliated Trustees may elect to defer for tax
purposes their receipt of this compensation under the John Hancock Group of
Funds Deferred Compensation Plan. The Fund makes investments into other John
Hancock Funds, as applicable, to cover its liability with regard to the deferred
compensation. Investments to cover the Fund's deferred compensation liability
are recorded on the Fund's books as an other asset. The deferred compensation
liability is marked to market on a periodic basis and income earned by the
investment is recorded on the Fund's books.
NOTE C --
INVESTMENT TRANSACTIONS
Purchases and proceeds from sales of securities, other than obligations of the
U.S. government and its agencies and short-term securities, during the period
ended December 31, 1995, aggregated $644,316,886 and $638,779,810, respectively.
Purchases and proceeds from sales of short-term municipal obligations during the
period ended December 31, 1995, aggregated $6,500,000 and $8,500,000,
respectively. There were no purchases or sales of long-term obligations of the
U.S. government and its agencies during the period ended December 31, 1995.
The cost of investments owned at December 31, 1995 for Federal income tax
purposes was $474,106,074. Gross unrealized appreciation and depreciation of
investments aggregated $42,833,371 and $8,525, respectively, resulting in net
unrealized appreciation of $42,824,846.
NOTE D --
RECLASSIFICATION OF CAPITAL ACCOUNTS
During the year ended December 31, 1995, the Fund has reclassified amounts to
reflect increases in accumulated net investment income and accumulated realized
loss on investments of $87,923. This represents the cumulative amounts necessary
to report these balances on a tax basis, excluding certain temporary
differences, as of December 31, 1995. Additional adjustments may be needed in
subsequent reporting periods. These reclassifications, which have no impact on
the net asset value of the Fund, are primarily attributable to certain
differences in the computation of distributable income and capital gains under
federal tax rules versus generally accepted accounting principles.
23
<PAGE> 226
NOTES TO FINANCIAL STATEMENTS
John Hancock Funds - Tax-Exempt Income Fund
NOTE E --
PLAN OF REORGANIZATION
On December 11, 1995, the Board of Trustees of the Fund approved a plan of
reorganization between the Fund and the John Hancock Tax-Free Bond Fund ("Bond
Fund") providing for the transfer of substantially all of the assets and
liabilities of the Fund to the Bond Fund in exchange solely for Class A and
Class B shares of the Bond Fund to be distributed to the Fund's Class A and
Class B shareholders, respectively.
24
<PAGE> 227
John Hancock Funds - Tax-Exempt Income Fund
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
To the Trustees and Shareholders of
John Hancock Tax-Exempt Income Fund
We have audited the accompanying statement of assets and liabilities of John
Hancock Tax-Exempt Income Fund (the "Fund"), including the schedule of
investments, as of December 31, 1995, and the related statement of operations
for the year then ended, the statement of changes in net assets for each of the
two years in the period then ended, and the financial highlights for each of the
periods indicated therein. These financial statements and financial highlights
are the responsibility of the Fund's management. Our responsibility is to
express an opinion on these financial statements and financial highlights based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and financial
highlights are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. Our procedures included confirmation of securities owned as of
December 31, 1995, by correspondence with the custodian and brokers, or other
appropriate auditing procedures when replies from brokers were not received. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements and financial highlights referred to
above present fairly, in all material respects, the financial position of John
Hancock Tax-Exempt Income Fund at December 31, 1995, the results of its
operations for the year then ended, the changes in its net assets for each of
the two years in the period then ended, and the financial highlights for each of
the indicated periods, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
January 31, 1996
TAX INFORMATION NOTICE (UNAUDITED)
For Federal Income Tax purposes, the following information is furnished with
respect to the distributions of the Fund for its fiscal year ended December 31,
1995.
For specific information on exemption provisions in your state, consult your
local state tax office or your tax adviser.
Income dividends are 99.9% tax-exempt. Approximately 13% of the 1995 income
dividends are subject to the alternative minimum tax. None of the income was
derived from U.S. Treasury obligations, or qualify for the corporate dividends
received deductions. Shareholders were mailed a 1995 U.S. Treasury Department
Form 1099-DIV in January 1996 representing their proportionate share.
25
<PAGE> 228
NOTES
John Hancock Funds - Tax-Exempt Income Fund
26
<PAGE> 229
NOTES
John Hancock Funds - Tax-Exempt Income Fund
27
<PAGE> 230
[LOGO] JOHN HANCOCK FUNDS
A GLOBAL INVESTMENT MANAGEMENT FIRM
101 HUNTINGTON AVENUE BOSTON, MA 02199-7603
[A 1/2" x 1/2" John Hancock Funds logo in upper Bulk Rate
left hand corner of the page. A box sectioned in U.S. Postage
quadrants with a triangle in upper left, a PAID
circle in upper right, a cube in lower left and Brockton, MA
a diamond in lower right. A tag line below reads Permit No. 582
"A Global Investment Management Firm."]
This report is for the information of shareholders of the John Hancock
Tax-Exempt Income Fund. It may be used as sales literature when preceded or
accompanied by the current prospectus, which details charges, investment
objectives and operating policies.
[A recycled logo in lower left hand corner with caption "Printed on Recycled
Paper."]
<PAGE> 231
<TABLE>
<CAPTION>
JOHN HANCOCK TAX FREE BOND
PROFORMA COMBINED STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
(UNAUDITED)
Tax Tax Exempt Pro
Free Income Forma
Bond Fund Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
ASSETS:
- -------
Investments, at value 205,442,483 516,930,920 - 722,373,403
Receivable for shares sold 7,615 53,251 - 60,866
Receivable for investment sold 12,238,500 561,000 - 12,799,500
Interest Receivable 3,387,852 11,112,667 - 14,500,519
Segregated assets (futures) 0 112,500 - 112,500
Receivable from JH Advisers, Inc. 27,926 0 - 27,926
Other assets 27,437 10,445 - 37,882
----------- ----------- ----------- -----------
Total Assets 221,131,813 528,780,783 - 749,912,596
LIABILITIES:
- ------------
Temporary overdraft of cash 3,533,358 4,544,139 - 8,077,497
Dividend Payables 25,227 72,239 - 97,466
Payable for investments repurchased 21,760,596 19,433,358 - 41,193,954
Payable for shares repurchased 8,787 348 - 9,135
Payable for futures variation margin 23,438 23,437 - 46,875
Payable to JH Advisers, Inc. 108,251 255,355 - 363,606
Accounts payable and accrued expenses 51,085 74,068 - 125,153
----------- ----------- ----------- -----------
25,510,742 24,402,944 - 49,913,686
NET ASSETS:
- ----------
Capital paid-in 195,035,479 470,926,567 - 665,962,046
Accumulated net realized gain (loss)
on investments and finacial contracts' (14,389,504) (9,352,555) - (23,742,059)
Net unrealized appreciation of investments
and financial futures contracts 14,975,096 42,713,108 - 57,688,204
Undistributed net investment income 0 90,719 - 90,719
----------- ----------- ----------- -----------
Net Assets 195,621,071 504,377,839 0 699,998,910
=========== =========== =========== ===========
NET ASSETS:
Tax Free Bond Fund
Class A 118,797,313 - 495,730,615 (a) 614,527,928
Class B 76,823,758 - 8,647,224 (a) 85,470,982
Tax Exempt Income Fund
Class A - 495,730,615 (495,730,615)(a) 0
Class B - 8,647,224 (8,647,224)(a) 0
----------- ----------- ----------- -----------
195,621,071 504,377,839 0 699,998,910
=========== =========== =========== ===========
SHARES OUTSTANDING:
Tax Free Bond Fund
Class A 11,137,117 - 46,474,198 (a) 57,611,315
Class B 7,202,812 - 810,743 (a) 8,013,555
Tax Exempt Income Fund
Class A - 45,056,903 (45,056,903) (a) 0
Class B - 786,183 (786,183) (a) 0
NET ASSET VALUE PER SHARE:
Tax Free Bond Fund
Class A $10.67 - $10.67
Class B $10.67 - $10.67
Tax Exempt Income Fund
Class A - $11.00 -
Class B - $11.00 -
</TABLE>
See Notes to Proforma Combined Financial Statements
<PAGE> 232
<TABLE>
<CAPTION>
JOHN HANCOCK TAX FREE BOND
PROJECTED PROFORMA COMBINED STATEMENT OF OPERATIONS
DECEMBER 31, 1995
(UNAUDITED)
Tax Tax Exempt Pro
Free Income Forma
Bond Fund Adjustments Combined
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment Income
Interest $ 12,440,385 $ 31,894,499 $ - $ 44,334,884
Expenses
Management Fee 1,048,120 $ 2,683,990 (79,834) (b) $ 3,652,277
Distribution/Service Fee
Class A 175,342 1,445,720 (119,696) (c) 1,501,366
Class B 663,054 61,171 75,865 (d) 800,090
Transfer Agent Fee 209,850 695,061 0 (e) 904,911
Registration & Filing Fees 63,679 37,810 (25,372) (f) 76,117
Custodian Fee 48,214 112,143 (25,357) (f) 135,000
Auditing 47,989 40,314 (38,303) (f) 50,000
Legal Fees 30,747 8,824 0 39,571
Trustee Fees 49,141 46,423 0 95,564
Printing 46,995 52,606 (24,900) (f) 74,701
Miscellaneous 26,802 19,493 (11,574) (f) 34,721
------------ ------------ ----------- ------------
Gross Fund Total Expenses 2,409,933 5,203,555 (249,171) 7,364,317
------------ ------------ ----------- ------------
Less Expense Reductions (24,419) (76,644) 0 (101,063)
Less Expense Reimbursement (208,207) 0 208,207 (g) 0
------------ ------------ ----------- ------------
Net Fund Total Expenses 2,177,307 5,126,911 (40,964) 7,263,254
------------ ------------ ----------- ------------
Net Investment Income $ 10,263,078 $ 26,767,588 $ 40,964 $ 37,071,630
------------ ------------ ----------- ------------
Realized and Unrealized Gain (Loss) on Investments
and Financial Futures Contract
Net Realized loss on investment (4,728,195) (1,285,961) 0 (6,014,156)
Net Realized loss on futures contracts (2,308,339) (4,504,789) 0 (6,813,128)
Change in appreciation/(depreciation)
of investments 31,679,568 53,660,722 0 85,340,290
Change in appreciation/(depreciation)
of futures contracts (262,500) 732,812 0 470,312
------------ ------------ ----------- ------------
Net Realized and Unrealized Gain on
Investments and Futures Contracts 24,380,534 48,602,784 0 72,983,318
------------ ------------ ----------- ------------
Net Increase in Net Assets Resulting
from Operations $ 34,643,612 $ 75,370,372 $ 40,964 $110,054,948
============ ============ =========== ============
</TABLE>
See Notes to Proforma Combined Financial Statements
<PAGE> 233
JOHN HANCOCK TAX FREE BOND
NOTES TO PRO FORMA FINANCIAL STATEMENTS -
(UNAUDITED)
DECEMBER 31, 1995
Pro forma information is intended to provide shareholders of John Hancock Tax
Exempt Income Fund (TEIF) with information about the impact of the proposed
merger by indicating how the merger might have affected information had the
merger been consummated as of January 1, 1995
The unaudited pro forma combined statements of assets and liabilities and
results of operations as of December 31, 1995, have been prepared to reflect
the merger of John Hancock Tax Free Bond (TFB) and TEIF after giving effect to
pro forma adjustments described in the notes listed below.
(a) Acquisition by TFB of all of the net assets of TEIF and issuance
of TFB Class A and Class B shares in exchange for all of the outstanding
Class A and Class B shares, respectively of TEIF.
(b) The investment advisory fee was adjusted to reflect the application
of the fee structure currently applicable to Tax Exempt Income Fund which
will be adopted for TFB after the reorganization: 0.55% of the first
$500,000,000 of the Fund's average daily net assets, 0.50% of the next
$500,000,000 and 0.45% of the Fund's average daily net assets in excess of
$1,000,000,000.
(c) The 12b-1 fee was adjusted to reflect the application of the fee
structure which will be proposed to the shareholders of TFB to
increase the Fund's Class A Rule 12b-1 fee from its current rate of
0.15% to 0.25%. The increase will not take effect until December 23, 1996
or later.
(d) The 12b-1 fee was adjusted to reflect the Board of Trustees of
TFB's approval of the termination of limiting the Class B Rule fee to
0.90%. As a result, Class B Rule 12b-1 fee will increase to 1.00%. The
increase will not take effect until December 23, 1996 or later.
(e) The transfer agent fee for each of the Class A and Class B shares
is the total of the respective individual fund's transfer agent fees.
The main criteria in determining the transfer agent fees for a specific
class is the number of the shareholder accounts.
(f) The actual expenses incurred by TFB and TEIF for various expenses
included on a pro forma basis were reduced to reflect the estimated savings
arising from the merger.
(g) Reflects removal of the TFB's management fee expense limitation.
<PAGE> 234
SCHEDULE OF INVESTMENTS
December 31, 1995 (Unaudited)
- -------------------------------------------------------------------------------
<TABLE>
The Schedule of Investments is a complete list of all securities owned by Tax Free Bond Fund and Tax-Exempt Income Fund combined
on December 31, 1995. The tax-exempt long-term bonds are further broken down by state and each state by a list of securities held
by the funds.
<CAPTION>
TAX FREE BOND TAX EXEMPT INCOME COMBINED
------------- ----------------- --------------
% of Par Value Par Value Par Value Yield at
Net Interest Maturity S+P (000's Market (000's Market (000's Market Market +
State - Issuer - Description Assets Rate % Date Rating*** Omitted) Value* Omitted) Value* Omitted) Value* %
- ---------------------------- ------ ------ -------- ------ ------- ------ -------- ------ -------- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
TAX-EXEMPT LONG-TERM BONDS
ALABAMA 0.79%
Mobile Industrial Development
Board,
Solid Waste Disp Rev Ref
Mobile Energy Serv Co Proj 6.950 % 01/01/20 BBB- 5,250 5,547,833 5,250 5,547,833 6.58
----------- ----------
5,547,833 5,547,833
ALASKA 0.36%
Alaska Housing Finance Corp,
Ins Mtg Prog 1990 1st Ser 7.750 12/01/14 A+ 1,000 1,065,590 1,000 1,065,590 7.27
Ins Mtg Prog 1990 1st Ser 7.800 12/01/30 A+ 1,380 1,463,200 1,380 1,463,200 7.36
----------- ----------
2,528,790 2,528,790
ARIZONA 2.40%
Arizona Health Facilities Auth,
Hosp Sys Rev Ref Phoenix Memorial
Hosp Proj 8.200 % 06/01/21 BBB 2,150 2,328,794 2,150 2,328,794 7.57
Maricopa County Pollution Control Corp,
Poll Control Rev Ref Ser A Public
Service Co Palo Verde Proj 6.375 08/15/23 BB 8,550 8,445,263 8,550 8,445,263 6.45
Phoenix, City of,
GO Ref Ser A 6.250 07/01/16 AA+ 2,700 3,107,052 2,700 3,107,052 5.43
Salt River Project Agricultural
Improvement and Power District,
Salt River Proj Elec Sys Rev
Ref Ser 1993C 5.250 01/01/19 AA 3,000 2,948,880 3,000 2,948,880 5.34
----------- ----------- ----------
2,328,794 14,501,195 16,829,989
CALIFORNIA 15.90%
California Statewide Community
Development Auth,
Rev Cert of Part Ref Ins'd Hlth
Facil Eskaton In 5.875 05/01/20 A 4,000 4,009,600 4,000 4,009,600 5.86
Central Coast Water Auth,
Rev Regional Facil St Wtr Proj 6.350 10/01/07 AAA 2,000 2,187,680 2,090 2,286,126 4,090 4,473,806 5.81
Central Valley Financing Auth,
Cogeneration Proj Rev Carson Ice
Gen Proj Ser 19 6.100 07/01/13 BBB- 1,000 1,020,950 1,000 1,020,950 5.97
Cogeneration Proj Rev Carson Ice
Gen Proj Ser 19 6.200 07/01/20 BBB- 5,000 5,107,950 5,000 5,107,950 6.07
Duarte, City of,
Cert of Part City of Hope National
Medical Center 6.250 04/01/23 BAA1*** 1,500 1,484,325 1,500 1,484,325 6.32
Fontana, County of,
Spec Tax of Community Facil Dist
No 90-3 Empire Center 8.400 04/01/15 B*** 500 478,750 500 478,750 8.77
Foothill/Eastern Transportation
Corridor Agency,
Toll Rd Rev Fixed Rate Cap
Apprec Ser 1995A Zero 01/01/19 BBB- 36,600 8,629,914 36,600 8,629,914 -
Toll Rd Rev Fixed Rate Cap
Apprec Ser 1995A Zero 01/01/20 BBB- 10,000 2,214,300 10,000 2,214,300 -
Toll Rd Rev Fixed Rate Cap
Apprec Ser 1995A Zero 01/01/24 BBB- 675 114,696 675 114,696 -
</TABLE>
<PAGE> 235
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Toll Rd Rev Fixed Rate Cap
Apprec Ser 1995A Zero 01/01/27 BBB- 1,000 140,540 1,000 140,540 -
Toll Rd Rev Fixed Rate Cap
Apprec Ser 1995A Zero 01/01/28 BBB- 7,915 1,044,147 7,915 1,044,147 -
Toll Rd Rev Fixed Rate Current
Int Ser 1995A 6.000 01/01/16 BBB- 2,000 2,007,520 13,500 13,550,760 15,500 15,558,280 5.98
Toll Rd Rev Fixed Rate Current
Int Ser 1995A 6.500 01/01/32 BBB- 1,950 2,030,906 1,950 2,030,906 6.24
Hawaiian Gardens Redevelopment Agency,
Tax Alloc Ref Proj No 1 6.200 12/01/23 BBB 3,000 3,004,830 3,000 3,004,830 6.19
Los Angeles, County of,
Cert of Part Civic Center Heating
& Refrigeration Plant Proj 8.000 06/01/10 A 1,000 1,107,630 1,000 1,107,630 7.22
Madera, County of,
Cert of Part Valley Children's
Hosp Proj 6.500 03/15/15 AAA 13,185 15,162,882 13,185 15,162,882 5.65
Metropolitan Water District,
Southern Calif Waterworks Rev Ser A 5.500 07/01/25 AAA 11,000 11,074,580 11,000 11,074,580 5.46
Southern Calif Waterworks Rev Reg
Inverse Floater 7.560# 08/05/22 AA 5,000 5,212,500 5,000 5,212,500 7.25
Sacramento Municipal Utility District,
Elec Rev Ref Ser A 6.250 08/15/10 AAA 1,280 1,431,066 1,280 1,431,066 5.59
Sacramento Power Auth,
Rev 1995 Ser Cogeneration Proj 6.000 07/01/22 BBB- 5,000 4,988,800 5,000 4,988,800 6.01
Saddleback Valley United School
District,
Spec Tax Community Facil District
No. 89-2 Ser A 7.750 09/01/16 BBB*** 2,000 2,086,280 2,000 2,086,280 7.43
San Bernardino, County of,
Cert of Part Ser 1994 Medical
Center Fin Proj 5.500 08/01/17 A- 9,130 8,740,514 9,130 8,740,514 5.75
Cert of Part Ser 1994 Medical
Center Fin Proj 5.500 08/01/22 A- 2,500 2,363,275 2,500 2,363,275 5.82
San Joaquin Hills Transportation
Corridor Agency,
Toll Rd Rev Jr Lien Cap Apprec Zero 01/01/28 BBB*** 1,550 147,777 1,550 147,777 -
Toll Rd Rev Sr Lien 5.000 01/01/33 BBB*** 1,435 1,228,274 1,435 1,228,274 5.84
Toll Rd Rev Sr Lien Cap Apprec Zero 01/01/14 BBB*** 5,000 1,656,650 5,000 1,656,650 -
Toll Rd Rev Sr Lien Cap Apprec Zero 01/01/21 BBB*** 375 78,934 375 78,934 -
Toll Rd Rev Sr Lien Cap Apprec Zero 01/01/22 BBB*** 5,000 988,850 5,000 988,850 -
Toll Rd Rev Sr Lien Conv Cap Apprec Zero 01/01/05 BBB*** 2,500 1,837,075 2,500 1,837,075 -
San Jose Financing Auth,
Rev Ser B Community Facil Proj 5.625 11/15/18 A+ 2,500 2,463,450 2,500 2,463,450 5.71
Southern California Public Power Auth,
Rev Elec Pwr & Light Imp 6.750 07/01/11 A 1,195 1,383,547 1,195 1,383,547 5.83
----------- ----------- -----------
17,994,635 93,270,443 111,265,078
COLORADO 3.15%
Arapahoe County Capital Improvement
Trust Fund,
Highway Rev Current Ser E-470 6.950 08/31/20 BAA*** 5,000 5,416,750 5,000 5,416,750 10,000 10,833,500 6.42
Denver, City and County of,
Airport Sys Rev Ser 1992A 7.250 11/15/25 BBB 2,000 2,204,960 5,000 5,512,400 7,000 7,717,360 6.58
Airport Sys Rev Ser 1994A 7.500 11/15/23 BBB 3,100 3,464,467 3,100 3,464,467 6.71
----------- ----------- ----------
11,086,177 10,929,150 22,015,327
CONNECTICUT 0.27%
Connecticut State Health and
Educational Facilities Auth,
Rev Ser D Quinnipiac College Iss 6.000 07/01/23 BBB- 2,000 1,889,700 2,000 1,889,700 6.35
----------- ----------
1,889,700 1,889,700
DELAWARE 0.71%
Delaware State Economic Development Auth,
Rev Ref Poll Control Ser B
Delmarva Pwr Proj 6.750 05/01/19 AAA 4,500 4,973,175 4,500 4,973,175 6.11
----------- ----------
4,973,175 4,973,175
FLORIDA 4.78%
Broward, County of,
</TABLE>
<PAGE> 236
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Resource Recovery Rev Ser 1984
Ses Broward Co. L.P. South 7.950 12/01/08 A 4,445 5,030,051 4,445 5,030,051 7.03
Florida, State of,
Sunshine Skyway Rev Ser of 1984 10.250 06/01/10 AAA 1,250 1,385,087 1,250 1,385,087 9.25
Hillsborough, County of,
Ref Util Rev Ser 1991A 7.000 08/01/14 BBB+ 1,245 1,343,990 1,245 1,343,990 6.48
Jacksonville Electric Auth,
Elec Sys Rev Ser 3-A 5.250 10/01/28 AA 9,000 8,765,910 9,000 8,765,910 5.39
Orange County Health Facilities Auth,
Rev Adventist Hlth Sys Hosp 5.250 11/15/20 AAA 5,000 4,904,400 5,000 4,904,400 5.35
Orlando Utilities Commission,
Wtr & Elec Sub Rev Ser 1989D 6.750 10/01/17 AA- 2,200 2,650,626 2,200 2,650,626 5.60
Palm Beach, County of,
Solid Waste Ind'l Dev Rev Ser
1993A Okeelanta Pwr Lp Proj 6.850 02/15/21 NR 7,500 7,728,825 7,500 7,728,825 6.65
Tampa Sports Auth,
Sales Tax Rev Tampa Bay Arena Proj 5.750 10/01/25 AAA 1,500 1,643,430 1,500 1,643,430 5.25
---------- ---------- ----------
15,313,740 18,138,579 33,452,319
GEORGIA 3.83%
Georgia Municipal Electric Auth,
Pwr Rev Ref Ser BB 5.700 01/01/19 A 1,000 1,029,890 1,000 1,029,890 5.53
Pwr Rev Ser M 8.375 01/01/20 A 1,000 1,059,560 1,000 1,059,560 7.90
Pwr Rev Ser C 5.700 01/01/19 AAA 5,000 5,291,550 5,000 5,291,550 5.39
Pwr Rev Ser EE 7.250 01/01/24 AAA 2,000 2,579,880 2,000 2,579,880 5.62
Pwr Rev Ser Z 5.500 01/01/20 AAA 5,840 6,021,741 5,840 6,021,741 5.33
Monroe County Development Auth,
Poll Control Rev Ser A
Oglethorpe Pwr Corp Scherer
Proj 6.800 01/01/12 A+ 1,000 1,165,240 1,000 1,165,240 5.84
Municipal Electric Auth,
Spec Oblig 5th Crossover Proj 1 6.500 01/01/17 AAA 3,500 4,072,390 3,500 4,072,390 5.59
Savannah Hospital Auth,
Rev Ref & Imp Candler Hosp Proj 7.000 01/01/23 BBB+ 5,470 5,616,760 5,470 5,616,760 6.82
---------- ---------- ----------
20,675,171 6,161,840 26,837,011
ILLINOIS 3.86%
Chicago, City of,
Chicago-O'Hare Int'l
Airport Gen Airport Rev 1990
Ser A 7.500 01/01/16 A+ 2,000 2,207,680 2,000 2,207,680 6.79
Chicago-O'Hare Int'l
Airport Int'l Terminal Spec
Rev Ser 1992 6.750 01/01/12 AAA 3,000 3,269,940 3,000 3,269,940 6.19
Chicago-O'Hare Int'l
Airport Spec Facil Rev Ser 1990A
American Airlines Proj 7.875 11/01/25 BB+ 3,000 3,273,960 3,000 3,273,960 7.22
Chicago-O'Hare Int'l Airport
Spec Facil Rev Ser 1992 Delta
Airlines Terminal Proj 6.450 05/01/18 BB 3,000 3,075,390 3,000 3,075,390 6.29
Illinois Development Finance Auth,
Poll Control Rev Ref Commonwealth
Edison Co Proj 5.850 01/15/14 BBB 3,000 2,902,590 3,000 2,902,590 6.05
Rev Cap Apprec Lockport School
District Proj Zero 01/01/14 AAA 5,650 2,157,791 5,650 2,157,791 -
Rev Cap Apprec Lockport School
District Proj Zero 01/01/15 AAA 5,935 2,147,877 5,935 2,147,877 -
Rev Ref Ser A Columbus Cuneo
Cabrini Proj 8.500 02/01/15 BBB+ 2,150 2,518,639 2,150 2,518,639 7.26
Illinois Health Facilities Auth,
Rev Ref Ser 1992 Mercy Hosp
& Medical Center Pro 7.000 01/01/07 A- 1,500 1,606,725 1,500 1,606,725 6.54
Rev Ref Friendship Vlg Schamburg 6.750 12/01/08 NR 1,640 1,739,663 1,640 1,739,663 6.36
Chicago, City of,
Skyway Toll Bridge Rev Ref
Ser 1994 6.750 01/01/17 BBB- 2,000 2,099,340 2,000 2,099,340 6.43
---------- ---------- ----------
6,357,642 20,641,953 26,999,595
INDIANA 1.17%
Indianapolis Airport Auth,
</TABLE>
<PAGE> 237
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Spec Facil Rev Ser A United
Airlines Proj 6.500 11/15/31 BB 7,000 7,156,310 1,000 1,022,330 8,000 8,178,640 6.36
---------- ---------- ----------
7,156,310 1,022,330 8,178,640
KANSAS 0.34%
Johnson County Water District No. 1,
Wtr Rev Ref Ser 1984 10.500 12/01/08 AAA 2,000 2,351,720 2,000 2,351,720 8.93
---------- ----------
2,351,720 2,351,720
KENTUCKY 1.09%
Kenton County Airport Board,
Rev Spec Facil Delta Airlines
Proj Ser 1992A 6.750 02/01/02 BB 2,000 2,128,820 2,000 2,128,820 6.34
Rev Spec Facil Delta Airlines
Proj Ser 1992A 7.500 02/01/12 BB 2,000 2,156,560 2,000 2,156,560 6.96
Rev Spec Facil Delta Airlines
Proj Ser 1992A 7.125 02/01/21 BB 2,000 2,114,840 2,000 2,114,840 6.74
Owensboro Electric Light
and Power Co,
Rev Deferred Int Ser B Zero 01/01/19 AAA 4,400 1,258,356 4,400 1,258,356 -
---------- ----------
7,658,576 7,658,576
LOUISIANA 1.42%
Louisiana Public Facilities Auth,
Rev Ser B Alton Ochsner
Medical Funding Proj 6.500 05/15/22 AAA 3,405 3,668,377 3,405 3,668,377 6.03
St. Charles, Parish of,
Poll Control Rev Ser
1991 Louisiana Pwr & Light
Co Proj 7.500 06/01/21 BBB+ 4,000 4,227,480 4,000 4,227,480 7.10
West Feliciana, Parish of,
Variable Rate Demand Poll
Control Rev Ser 1985C
Gulf States Util Co Proj 7.000 11/01/15 BB+ 2,000 2,076,020 2,000 2,076,020 6.74
---------- ---------- ----------
2,076,020 7,895,857 9,971,877
MARYLAND 0.49%
Baltimore, City of,
Rev Ref Ser A Wtr Proj 5.000 07/01/24 AAA 3,500 3,442,530 3,500 3,442,530 5.08
---------- ----------
3,442,530 3,442,530
MASSACHUSETTS 6.68%
Massachusetts Bay
Transportation Auth,
Gen Trans Sys 1990 Ser B 7.875 03/01/21 AAA 2,000 2,363,420 2,000 2,363,420 6.66
Massachusetts, Commonwealth of,
GO Consol Loans of 1994 Ser B 6.000 08/01/14 A+ 2,000 2,120,560 2,000 2,120,560 5.66
Massachusetts Health and
Educational Facilities Auth,
Rev Brigham & Women's Hosp Iss
Ser D 6.750 07/01/24 A+ 2,450 2,609,642 2,450 2,609,642 6.34
Rev Harvard Univ Iss Ser P 5.375 11/01/32 AAA 9,670 9,630,740 9,670 9,630,740 5.40
Rev Lowell Gen Hosp Iss Ser A 8.400 06/01/11 BAA1*** 1,100 1,223,024 1,100 1,223,024 7.56
Rev New England Deaconess Hosp
Iss Ser D 6.625 04/01/12 A 3,500 3,658,900 3,500 3,658,900 6.34
Rev New England Deaconess Hosp
Iss Ser D 6.875 04/01/22 A 7,960 8,365,005 7,960 8,365,005 6.54
Rev New England Medical Center
Hosp Iss Ser E 7.875 07/01/11 A- 1,950 2,157,343 1,950 2,157,343 7.12
Rev Worcester Polytechnic
Institute Ser E 6.750 09/01/11 A+ 2,000 2,243,280 2,000 2,243,280 6.02
Massachusetts Housing Finance Agency,
Residential Dev 1992 Ser A 6.900 11/15/24 AAA 2,700 2,859,759 2,700 2,859,759 6.51
Single Family Hsg Ser 8 7.700 06/01/17 A+ 1,500 1,608,000 1,500 1,608,000 7.18
Massachusetts Municipal Wholesale
Electric Co,
Pwr Supply Sys Rev 1992
Ser B A Pub Corp of The
Commonwealth 6.750 07/01/17 BBB+ 4,405 4,812,727 4,405 4,812,727 6.18
Plymouth, County of,
Cert of Part Ser A Plymouth
County Correctional Facil Proj 7.000 04/01/22 A- 2,750 3,087,645 2,750 3,087,645 6.23
---------- ----------
46,740,045 46,740,045
MICHIGAN 2.85%
Detroit, City of,
Sewage Disposal Rev Ser 1993
Linked Pars & Inflos 7.116# 07/01/23 AAA 2,000 2,060,000 2,000 2,060,000 6.91
</TABLE>
<PAGE> 238
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Michigan State Hospital Finance
Auth,
Rev Ref 1990 Ser A Bay
Medical Center Hosp 8.250 07/01/12 BAA1*** 2,250 2,449,192 2,250 2,449,192 7.58
Hosp Rev Ref Ser 1995A
Genesys Hlth Sys Oblig Group 8.100 10/01/13 BBB 4,250 4,747,675 4,250 4,747,675 7.25
Hosp Rev Ref Sinai Hospital Proj 6.700 01/01/26 BAA*** 2,500 2,524,625 2,500 2,524,625 6.63
Wayne Charter County of,
Spec Airport Facil Rev Ref
Ser 1995 Northwest Airlines
Facil 6.750 12/01/15 NR 5,200 5,359,900 5,200 5,359,900 6.55
Williamston Community School
District,
GO Ser 1996** 5.500 05/01/25 AAA 2,725 2,803,807 2,725 2,803,807 5.35
--------- ---------- ----------
5,252,999 14,692,200 19,945,199
MISSISSIPPI 1.37%
Claiborne, County of,
Poll Control Rev Ref Sys
Energy Resources Inc 7.300 05/01/25 BBB- 4,000 4,186,800 4,000 4,186,800 6.97
Mississippi Home Corp,
Single Family Sr Rev Ref
Ser 1990A 9.250 03/01/12 AAA 130 142,418 130 142,418 8.44
Washington, County of,
Poll Control Rev Ref Mississippi
Pwr & Light Co Proj 7.000 04/01/22 BAA3*** 5,000 5,291,800 5,000 5,291,800 6.61
--------- ---------- ----------
9,478,600 142,418 9,621,018
NEBRASKA 0.19%
Omaha Public Power District,
Elec Sys Rev 1992 Ser B 6.200 02/01/17 AA 1,200 1,360,860 1,200 1,360,860 5.47
---------- ----------
1,360,860 1,360,860
NEVADA 1.45%
Clark, County of,
Ind'l Development Rev Ser A
Southwest Gas Corp Proj 6.500 12/01/33 BBB- 10,000 10,160,000 10,000 10,160,000 6.40
--------- ----------
10,160,000 10,160,000
NEW HAMPSHIRE 0.57%
New Hampshire Higher Educational
and Health Facilities Auth,
Hosp Rev Wentworth Douglass Hosp 5.375 01/01/15 AAA 1,300 1,325,675 1,300 1,325,675 5.27
New Hampshire Industrial
Development Auth,
Rev Ref Poll Control
Central Maine Pwr 7.375 05/01/14 BB 2,500 2,680,325 2,500 2,680,325 6.88
--------- ----------
4,006,000 4,006,000
NEW JERSEY 1.17%
New Jersey Economic Development Auth,
Rev Poll Control General Motors
Corp Proj 5.350 04/01/09 A- 1,500 1,488,630 1,500 1,488,630 5.39
Rev Ref Ser J Holt Hauling Proj 8.500 11/01/23 NR 2,500 2,574,775 2,500 2,574,775 8.25
New Jersey Turnpike Auth,
Turnpike Rev Ser 1984 10.375 01/01/03 AAA 1,900 2,377,204 1,900 2,377,204 8.29
Ser 1991 C 6.500 01/01/16 AAA 1,500 1,748,955 1,500 1,748,955 5.57
--------- ---------- ----------
5,812,360 2,377,204 8,189,564
NEW YORK 11.10%
Metropolitan Transportation Auth,
Transit Facil 1987 Serv
Contract Ser 1 8.500 07/01/17 AAA 1,000 1,087,970 1,000 1,087,970 7.81
New York, City of,
GO Fiscal 1991 Ser D 8.000 08/01/04 BBB+ 250 285,718 250 285,718 7.00
GO Fiscal 1991 Ser F 8.200 11/15/03 BBB+ 1,250 1,451,587 1,250 1,451,587 7.06
GO Fiscal 1992 Ser A 7.750 08/15/12 BBB+ 2,000 2,262,100 2,000 2,262,100 6.85
GO Fiscal 1992 Ser D 7.700 02/01/09 BBB+ 1,000 1,131,000 1,000 1,131,000 6.81
GO Fiscal 1992 Ser H 7.000 02/01/08 BBB+ 2,000 2,178,140 2,000 2,178,140 6.43
GO Fiscal 1993 Ser D 5.750 08/15/13 BBB+ 3,170 3,097,724 3,170 3,097,724 5.88
GO Fiscal 1995 Ser B 7.000 08/15/16 BBB+ 3,000 3,289,680 3,000 3,289,680 6.38
GO Fiscal 1996 Ser F** 5.750 02/01/19 BBB+ 6,000 5,842,680 6,000 5,842,680 5.90
</TABLE>
<PAGE> 239
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
GO Fiscal 1996 Ser G** 5.750 02/01/20 BBB+ 5,950 5,790,956 5,950 5,790,956 5.91
GO Fiscal 1996 Ser G** 6.750 02/01/09 BBB+ 2,500 2,710,775 2,500 2,710,775 6.23
New York City Industrial
Development Agency,
Solid Waste Disposal Rev
1995 Visy Paper NY Inc Proj** 7.950 01/01/28 NR 3,250 3,317,502 3,250 3,317,502 7.79
New York Local Government Assistance Corp,
Ser 1992 A Pub Benefit Corp 6.875 04/01/19 A 8,700 9,758,877 8,700 9,758,877 6.13
New York State Dormitory Auth,
City Univ Ref Iss 1988B 8.125 07/01/08 BBB 1,000 1,109,690 1,000 1,109,690 7.32
City Univ Sys Cons Rev Ser 1995A 5.625 07/01/16 BBB 2,000 2,013,340 2,000 2,013,340 5.59
Cornell Univ Rev Ser 1990A 7.375 07/01/30 AA 1,000 1,125,880 1,000 1,125,880 6.55
State Univ Ed Facil Rev Iss
Ser 1990B 7.500 05/15/11 BBB+ 500 608,115 500 608,115 6.17
New York State Energy Research
and Development Auth,
Elec Facil Rev Ser 1990 A
Long Island Lighting Co Proj 7.150 06/01/20 BB+ 6,000 6,164,580 6,000 6,164,580 6.96
Elec Facil Rev Ser 1991 A
Consol Edison Co of NY Inc Proj 7.500 01/01/26 A+ 2,000 2,185,240 2,000 2,185,240 6.86
New York State Environmental
Facilities Corp,
State Wtr Poll Control Revolving
Fund Rev Ser 1990A 7.500 06/15/12 A 3,770 4,212,749 3,770 4,212,749 6.71
New York State Housing Finance Agency,
State Univ Construction Ref
1986 Ser A 8.000 05/01/11 AAA 2,000 2,566,840 2,000 2,566,840 6.23
New York State Medical Care
Facilities Finance Agency,
Mental Hlth Serv Facil
Imp Rev 1990 Ser B 7.875 08/15/08 BBB+ 500 559,595 500 559,595 7.04
Mental Hlth Serv Facil
Imp Rev 1990 Ser B 7.875 08/15/20 BBB+ 460 518,871 460 518,871 6.98
Mental Hlth Serv Facil
Imp Rev 1991 Ser A 7.750 08/15/11 BBB+ 540 610,319 540 610,319 6.86
Mental Hlth Serv Facil
Imp Rev 1991 Ser A 7.750 08/15/11 AAA 1,460 1,719,617 1,460 1,719,617 6.58
New York State Mortgage Agency,
Homeowner Mtg Rev Ser BB-2 7.950 10/01/15 AA*** 1,135 1,197,697 1,135 1,197,697 7.53
New York State Power Auth,
Gen Purpose Ser V 7.875 01/01/13 AAA 2,400 2,627,736 2,400 2,627,736 7.19
Gen Purpose Ser V 8.000 01/01/17 AA 1,850 2,027,692 1,850 2,027,692 7.30
Triborough Bridge and Tunnel Auth,
Gen Purpose Rev Ser L 8.125 01/01/12 A+ 1,750 1,917,265 1,750 1,917,265 7.42
Gen Purpose Rev Ser R 7.375 01/01/16 AAA 1,600 1,810,880 1,600 1,810,880 6.52
Spec Oblig Ref Ser 1991B 6.875 01/01/15 A- 2,300 2,531,265 2,300 2,531,265 6.25
---------- ---------- ----------
13,646,976 64,065,104 77,712,080
NORTH CAROLINA 3.27%
North Carolina Eastern Municipal Power Agency,
Pwr Sys Rev Ref Ser 1991A 5.750 01/01/19 BBB+ 4,000 3,910,200 4,000 3,910,200 5.88
Pwr Sys Rev Ref Ser 1993C 5.000 01/01/21 BBB+ 5,000 4,463,350 5,000 4,463,350 5.60
North Carolina Municipal Power Agency Number 1,
Catawba Elec Rev Ser 1992 5.750 01/01/15 A- 7,410 7,410,000 7,410 7,410,000 5.75
Catawba Elec Rev Ser 1993 5.000 01/01/15 AAA 5,220 5,033,855 5,220 5,033,855 5.18
North Carolina Eastern Municipal Power Agency,
Pwr Sys Rev Ref Ser 1993B 6.000 01/01/22 A- 2,000 2,064,300 2,000 2,064,300 5.81
---------- ---------- ----------
2,064,300 20,817,405 22,881,705
OHIO 4.33%
Cleveland Public Power System,
Elec Sys Rev 1st Mtg Ser A 7.000 11/15/24 AAA 6,200 7,213,328 6,200 7,213,328 6.02
Franklin, County of,
Hosp Facil Ref & Imp Rev Ser
1990B Riverside United Methodist 7.600 05/15/20 AA- 1,000 1,152,150 1,000 1,152,150 6.60
Lorain, County of,
Rev 1st Mtg Ser A Kendal
At Oberlin Proj 8.625 02/01/22 NR 3,600 3,978,288 3,600 3,978,288 7.80
Ohio State Air Quality Development Auth,
</TABLE>
<PAGE> 240
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Rev Adj Ser B Columbus &
South Proj 6.250 12/01/20 BBB*** 4,500 4,477,230 4,500 4,477,230 6.28
Ohio State Water Development Auth,
Poll Control Facil Rev
Ref Ser 1989A Ohio Edison Co Proj 7.625 07/01/23 BB+ 8,390 9,037,205 8,390 9,037,205 7.08
Poll Control Facil
Rev Ref Ser 1995 Cleveland Elec
Co Proj 7.700 08/01/25 BB 2,800 3,004,232 2,800 3,004,232 7.18
Student Loan Funding Corp,
Sub Rev Ser B Cincinnati
Ohio Student Loan 8.875 08/01/08 NR 1,420 1,461,720 1,420 1,461,720 8.62
---------- ---------- ----------
1,461,720 28,862,433 30,324,153
OKLAHOMA 0.95%
Oklahoma Turnpike Auth,
Turnpike Sys 1st Sr Rev Ser 1989 7.875 01/01/21 A+ 1,745 1,958,274 1,745 1,958,274 7.02
Tulsa Municipal Airport Auth,
Rev American Airlines Proj 6.250 06/01/20 BB+ 2,500 2,556,175 2,500 2,556,175 6.11
Tulsa Municipal Airport Trust, Trustees of,
Rev Ser 1988 American Airlines Inc 7.375 12/01/20 BB+ 2,000 2,148,140 2,000 2,148,140 6.87
---------- ---------- ----------
2,556,175 4,106,414 6,662,589
OREGON 1.44%
Oregon Health Sciences University,
Ins Rev Cap Apprec 1995 Ser A** Zero 07/01/14 AAA 1,750 656,372 1,750 656,372 -
Ins Rev Cap Apprec 1995 Ser A** Zero 07/01/15 AAA 2,220 786,546 2,220 786,546 -
Ins Rev Cap Apprec 1995 Ser A** Zero 07/01/16 AAA 10,700 3,558,820 10,700 3,558,820 -
Western Generation Agency,
Rev 1994 Ser A Wauna
Cogeneration Proj 7.125 01/01/21 NR 4,800 5,059,440 4,800 5,059,440 6.76
---------- ---------- ----------
5,001,738 5,059,440 10,061,178
PENNSYLVANIA 9.40%
Allegheny County Industrial
Development Auth,
Rev Ref Ser 1994A Environmental
Imp USX Corp Pro 6.700 12/01/20 BB+ 5,000 5,201,200 5,000 5,201,200 10,000 10,402,400 6.44
Beaver County Industrial
Development Auth,
Coll Poll Control Rev Ref
Ser 1995A Toledo Edison Co
Beaver 7.750 05/01/20 BB 7,500 8,116,500 7,500 8,116,500 7.16
Delaware County Industrial
Development Auth,
Poll Control Rev Ref 1991 Ser
A Philadelphia Elec Co Proj 7.375 04/01/21 BBB+ 6,095 6,631,421 6,095 6,631,421 6.78
Poll Control Rev Ref Ser A
Ohio Edison Proj 7.750 09/01/24 BB+ 1,400 1,499,162 1,400 1,499,162 7.24
Exeter Township School District,
GO Cap Apprec Ser 1994** Zero 05/15/16 AAA 3,785 1,269,338 3,785 1,269,338 -
Keystone Oaks School District,
Variable Rate Ser D 7.318 09/01/16 AAA 2,950 3,071,687 2,950 3,071,687 7.03
Pennsylvania Convention Center Auth,
Rev Ref Ser 1994A 6.700 09/01/14 BB 4,950 5,436,189 4,950 5,436,189 6.10
Pennsylvania Economic Development
Finance Auth,
Resource Recovery Rev Ser
1994D Colver Proj 7.125 12/01/15 BBB- 7,000 7,571,340 7,000 7,571,340 6.59
Pennsylvania State Turnpike
Commission,
Turnpike Rev Ser N 6.500 12/01/13 A 2,840 3,061,832 2,840 3,061,832 6.03
Philadelphia Hospitals and Higher
Education Facilities Auth,
Hosp Rev 1991 Ser A Philadelphia
Protestant Home Proj 8.625 07/01/21 NR 2,700 2,848,203 2,700 2,848,203 8.18
Hosp Rev 1992 Ser A Childrens
Seashore House Proj 7.000 08/15/12 A- 1,250 1,351,437 1,250 1,351,437 6.47
Philadelphia Industrial Development
Auth,
Commercial Development Rev
Ser 1995 Philadelphia Airport 7.750 12/01/17 NR 3,250 3,398,330 3,250 3,398,330 7.41
Philadelphia, City of,
Wtr & Swr Rev 16th Ser 7.500 08/01/10 AAA 3,000 3,524,490 3,000 3,524,490 6.38
Scranton-Lackawanna Health and
Welfare Auth,
Rev Ser A Allied Services
Rehabilitation Hosp Proj 7.600 07/15/20 NR 3,000 3,157,650 3,000 3,157,650 7.22
Westmoreland County Municipal Auth,
</TABLE>
<PAGE> 241
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Municipal Serv Rev Cap Apprec
Ser C Zero 08/15/17 AAA 10,880 3,350,931 10,880 3,350,931 -
York County Solid Waste and
Refuse Auth,
Adj Tender Ind'l Dev Rev
Ser of 1985 Resource Resource
Recovery Proj 8.200 12/01/14 AA- 1,000 1,090,600 1,000 1,090,600 7.52
---------- ---------- ----------
20,653,829 45,127,681 65,781,510
PUERTO RICO 2.82%
Puerto Rico Aqueduct and Sewer Auth,
Ref Pars & Inflos Ser 1995 Gtd
by the Commonwealth of Puert 6.000 07/01/11 AAA 200 220,474 200 220,474 5.44
Ref Pars & Inflos Ser 1995 Gtd
by the Commonwealth of Puert 8.220 07/01/11 AAA 5,500 6,620,625 5,500 6,620,625 6.83
Puerto Rico, Commonwealth of,
GO Pub Imp Ref Inverse
Floater Ser 1992A 7.534 07/01/08 AAA 2,700 3,000,375 2,700 3,000,375 6.78
Puerto Rico Highway and
Transportation Auth,
Highway Rev Ref Ser W 5.500 07/01/13 A 5,000 5,095,950 5,000 5,095,950 5.40
Puerto Rico Public Building Auth,
Gtd Rev Gov't Facil Ser A 6.250 07/01/14 AAA 2,195 2,492,203 2,195 2,492,203 5.50
Gtd Rev Gov't Facil Ser A 6.250 07/01/15 AAA 1,100 1,253,681 1,100 1,253,681 5.48
University of Puerto Rico,
Univ Rev Ser M 5.250 06/01/25 AAA 1,100 1,088,560 1,100 1,088,560 5.31
---------- ---------- ----------
10,930,034 8,841,834 19,771,868
SOUTH CAROLINA 1.74%
Piedmont Municipal Power Agency,
Rev Ref South Carolina Elec Sys 5.375 01/01/25 AAA 6,305 6,421,706 3,000 3,055,530 9,305 9,477,236 5.28
South Carolina Public Service Auth,
Santee Cooper Elec Sys Exp Rev
Ref 1988 Ser A 7.875 07/01/21 A+ 2,615 2,667,901 2,615 2,667,901 7.72
---------- ---------- ----------
6,421,706 5,723,431 12,145,137
SOUTH DAKOTA 0.15%
South Dakota Health and Educational
Facilities Auth,
Rev Ser 1989 Sioux Valley Hosp Iss 7.625 11/01/13 AA- 925 1,029,812 925 1,029,812 6.85
---------- ----------
1,029,812 1,029,812
TENNESSEE 1.98%
Maury County Industrial Development
Board, Multi-Modal Interchangeable
Rate Poll Control Ref Rev Saturn 6.500 09/01/24 A- 9,000 9,576,270 9,000 9,576,270 6.11
Memphis-Shelby County Airport Auth,
Rev Ref Federal Express Corp 6.750 09/01/12 BBB 4,000 4,266,920 4,000 4,266,920 6.33
---------- ----------
13,843,190 13,843,190
TEXAS 5.40%
Brazos River Auth,
Coll Rev Ref Ser 1988B
Houston Lighting & Pwr Co Proj 8.250 05/01/15 A 2,000 2,178,620 2,000 2,178,620 7.57
Dallas-Fort Worth International Airport,
Rev Delta Air Lines Inc 7.600 11/01/11 BB 3,000 3,243,240 3,000 3,243,240 7.03
Rev American Airlines Inc 7.250 11/01/30 BB+ 10,250 11,083,735 10,250 11,083,735 6.70
Spec Facil Rev American
Airlines Inc 7.250 11/01/12 BB+ 1,900 1,900,133 1,900 1,900,133 7.25
Ector County Hospital District,
Hosp Rev 1992 7.300 04/15/12 A- 4,000 4,393,800 4,000 4,393,800 6.65
El Paso International Airport,
Rev Ref Spec Facil Marriott
Corp Proj 7.750 03/01/12 BBB 1,410 1,456,192 1,410 1,456,192 7.50
Harris County Health Facilities
Development Corp,
Hosp Rev Ser 1988A Saint Luke's
Episcopal Hosp Proj 8.250 02/15/08 AAA 1,000 1,152,770 1,000 1,152,770 7.16
Harris County Industrial
Development Corp,
Marine Term & Wtr Poll Control
Ref GATX Terminals Corp Proj 6.625 02/01/24 BBB+ 1,000 1,046,800 1,000 1,046,800 6.33
Texas Turnpike Auth,
Dallas North Thruway Rev
Ref Ser 1996** 5.000 01/01/10 AAA 7,000 6,597,640 7,000 6,597,640 5.30
</TABLE>
<PAGE> 242
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dallas North Thruway Ref
Ser 1996** 5.500 01/01/15 AAA 5,000 4,775,550 5,000 4,775,550 5.76
----------- ----------- -----------
17,980,527 19,847,953 37,828,480
UTAH 0.15%
Carbon, County of,
Solid Waste Disposal Rev Ref
Ser A East Carbon Development 9.000 07/01/12 NR 1,000 1,068,190 1,000 1,068,190 8.43
----------- -----------
1,068,190 1,068,190
VIRGINIA 0.70%
Pittsylvania County Industrial
Development Auth,
Rev Ser A Exempt Facil 7.550 01/01/19 NR 4,500 4,923,810 4,500 4,923,810 6.90
----------- -----------
4,923,810 4,923,810
WASHINGTON 4.25%
Port of Walla Walla Public Corp,
Solid Waste Recycling Rev
Ser 1995 Ponderosa Fibres Proj 9.125 01/01/26 NR 1,000 1,035,030 1,000 1,035,030 8.82
Port of Walla Walla Public Corp,
Solid Waste Recycling Rev
Ser 1995 Ponderosa Fibres Proj 9.125 01/01/26 NR 11,000 11,385,330 11,000 11,385,330 8.82
Seattle, City of,
Municipal Light & Pwr Rev 1994 6.625 07/01/16 AA 3,600 3,969,324 3,600 3,969,324 6.01
Washington Public Power Supply System,
Nuclear Proj No. 1 Ref
Rev Ser 1989A 7.500 07/01/15 AA 1,455 1,605,505 1,455 1,605,505 6.80
Nuclear Proj No. 1 Ref
Rev Ser 1989B 7.125 07/01/16 AA 1,500 1,770,720 1,500 1,770,720 6.04
Nuclear Proj No. 1 Ref
Rev Ser 1991A 6.875 07/01/17 AA 1,250 1,366,087 1,250 1,366,087 6.29
Nuclear Proj No. 2 Ref
Rev Ser 1990C 7.625 07/01/10 AAA 5,000 5,834,700 5,000 5,834,700 6.53
Nuclear Proj No. 3 Ref
Rev Ser 1989B 7.250 07/01/15 AA 2,500 2,817,800 2,500 2,817,800 6.43
----------- ----------- -----------
1,035,030 28,749,466 29,784,496
WISCONSIN 0.66%
Wisconsin Public Power Inc,
Pwr Supply Sys Rev Ser 1990A 7.400 07/01/20 AAA 4,000 4,590,360 4,000 4,590,360 6.45
----------- ----------- -----------
4,590,360 4,590,360
TOTAL TAX EXEMPT LONG TERM BONDS
(Cost $664,160,199) 103.20% 213,750 205,442,483 555,025 516,930,921 768,775 722,373,404
COMBINED NET ASSETS 195,621,071 504,377,839 699,998,910
</TABLE>
<PAGE> 243
NOTES TO SCHEDULE OF INVESTMENTS
(UNAUDITED)
* Securities in the Fund's portfolio are valued on the basis of market
quotations, valuations provided by independent pricing services or, at
fair value as determined in good faith in accordance with procedures
approved by the Trustees. Short-term debt investments maturing within
60 days are valued at amortized cost which approximates market value.
** These securities having an aggregate value of $38,109,987, have been
purchased as forward commitments - that is, the Fund has agreed on the
trade date, to take delivery of and make payment for such securities
on a delayed basis subsequent to the date of this schedule. The
purchase price and interest rate of such securities is fixed at trade
date, although the Fund does not earn any interest on such securities
until settlement date. The Fund has instructed its Custodian Bank to
segregate assets with the current value at least equal to the amount
of its forward commitment. Accordingly, the market values of
$6,631,421 of Delaware County Industrial Development Finance Auth,
Poll Control Rev Ref 1991 Ser A Philadelphia Elec Co, 7.375%,
04-01-21, $14,605,127 of Madera, County of, Cert of Part Valley
Children's Hosp Proj, 6.500%, 03-15-15, and $1,406,106 of Pennsylvania
Economic Development Finance Auth, Resource Recovery Rev Ser 1994D
Colver Proj, 7.125%, 12-01-15, has been segregated to cover the
forward commitments, and the market values of $5,082,809 of Savannah
Hospital Auth, Rev Ref & Imp Candler Hosp Proj, 7.000%, 01-01-20,
$1,136,036 of El Paso International Airport, Rev Ref Spec Facil
Marriot Corp Proj, 7.750%, 03-01-12, $1,904,958 of Georgia Municipal
Electric Auth, Pwr Rev Ser C, 5.700%, 01-01-19, $8,751,300 of
Jacksonville Electric Auth, Elec Sys Rev 3-A, 5.250%, 10-01-28, and
$3,773,899 of Georgia Municipal Electric Auth, Pwr Rev Ser Z, 5.500%,
01-01-20, has been segregated to cover the forward commitments.
*** Credit Ratings are rated by Moody's Investors Services, Fitch or John
Hancock Advisers, Inc. where Standard & Poor's ratings are not
available and are unaudited.
NR Not rated.
+ The yield is not calculated with guidelines established by the U.S.
Securities Exchange Commission and is unaudited.
# Represents rate in effect on December 31, 1995.
The percentages shown for each investment category is the total value
of that category as a percentage of the net assets of the Fund.
<PAGE> 244
PART C
OTHER INFORMATION
ITEM 15. INDEMNIFICATION
No change from the information set forth in Item 27 of the Registration
Statement of John Hancock Tax-Free Bond Fund (the "Registrant") on
Form N-1A under the Securities Act of 1933 and the Investment Company
Act of 1940 (File Nos. 33-32246 and 811-5968), which information is
incorporated herein by reference.
<TABLE>
ITEM 16. EXHIBITS:
<S> <C> <C>
1.1 Registrant's Declaration of Filed as Exhibit 1(a) to
Trust dated November 9, 1989 Registrant's Registration
Statement on Form N-1A and
incorporated herein by
reference.
1.2 Amended and Restated Filed as Exhibit 1(b) to
Declaration of Trust dated Registrant's Registration
December 18, 1989 Statement on Form N-1A and
incorporated herein by
reference.
1.3 Amendment to Declaration of Filed as Exhibit 1(c) to
Trust dated October 22, 1991 Registrant's Registration
Statement on Form N-1A and
incorporated herein by
reference.
1.4 Amendment to Declaration of Filed as Exhibit 1(d) to
Trust dated December 16, 1994 Registrant's Registration
Statement on Form N-1A and
incorporated herein by
reference.
</TABLE>
<PAGE> 245
<TABLE>
<S> <C> <C>
2. By-Laws of Registrant. Filed as Exhibit 2 to
Registrant's Registration
Statement on Form N-1A and
incorporated herein by
reference.
3. Not applicable.
4. Form of Agreement and Plan of Filed herewith as Exhibit B
Reorganization between the to the Proxy Statement and
Registrant and John Hancock Prospectus included as Part A
Tax-Exempt Income Fund. of this Registration Statement.
5. Not applicable.
6.1 Investment Advisory Agreement Filed as Exhibit 5(a) to
between the Registrant and John Registrant's Registration
Hancock Advisers, Inc. Statement on Form N-1A and
incorporated herein by
reference.
6.2 Sub-Advisory Agreement between Filed as Exhibit 5(b) to
John Hancock Advisers, Inc. and Registrant's Registration
Transamerica Investment Services, Statement on Form N-1A
Inc. and incorporated herein by
reference.
6.3 Administrative Services Agreement Filed as Exhibit 5(c) to
between John Hancock Advisers, Inc. Registrant's Registration
and the Registrant. Statement on Form N-1A and
incorporated herein by
reference.
7.1 Distribution Agreement between Filed as Exhibit 6(a) to
the Registrant and John Hancock Registrant's Registration
Funds, Inc. Statement on Form N-1A and
incorporated herein by
reference.
</TABLE>
-2-
<PAGE> 246
<TABLE>
<S> <C> <C>
7.2 Form of Soliciting Dealer Filed as Exhibit 6(b) to
Agreement between John Hancock Registrant's Registration
Funds, Inc. and the John Hancock Statement on Form N-1A and
funds. incorporated herein by
reference.
7.3 Form of Financial Institution Filed as Exhibit 6(c) to
Sales and Service Agreement Registrant's Registration
between John Hancock Funds, Statement on Form N-1A and
Inc. and the John Hancock funds. incorporated herein by
reference.
8. Not applicable.
9. Form of Master Custodian Agreement Filed as Exhibit 8 to
between the John Hancock funds Registrant's Registration
and State Street Bank. Statement on Form N-1A and
incorporated by reference
herein.
10.1 Form of 12b-1 Plan for Class A Filed as Exhibit 15(a) to
Shares. Registrant's Registration
Statement on Form N-1A and
incorporated herein by
reference.
10.2 Form of 12b-1 Plan for Class B Filed as Exhibit 15(b) to
Shares. Registrant's Registration
Statement on Form N-1A and
incorporated herein by
reference.
11. Opinion as to legality of Filed herewith as Exhibit 11.
shares, and consent.
12. Form of opinion as to tax Filed herewith as Exhibit 12.
matters, and consent.
13. Not applicable.
14. Consents of Ernst & Young LLP Filed herewith as Exhibit 14.
regarding the audited financial
statements and highlights of
Registrant and John Hancock
Tax-Exempt Income Fund.
15. Not applicable.
-3-
</TABLE>
<PAGE> 247
<TABLE>
<S> <C> <C>
16. Powers of Attorney. Filed as addendum to signa-
ture pages of Registrant's
Registration Statement on Form
N-1A and incorporated herein
by reference.
17. Declaration of the Registrant Filed herewith as Exhibit 17.
pursuant to Rule 24f-2 under
the Investment Company Act of
1940.
18. Prospectus of John Hancock Tax- Filed herewith as Exhibit 18.
Exempt Income Fund dated May 1,
1995 as supplemented December
11, 1995.
</TABLE>
ITEM 17. UNDERTAKINGS.
(1) The undersigned Registrant agrees that prior to any public
reoffering of the securities registered through the use of a prospectus
which is a part of this Registration Statement by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c)
under the Securities Act of 1933, as amended (the "1933 Act"), the
reoffering prospectus will contain the information called for by the
applicable registration form for reofferings by persons who may be
deemed underwriters, in addition to the information called for by the
other items of the applicable form.
(2) The undersigned Registrant agrees that every prospectus that is
filed under paragraph (1) above will be filed as a part of an amendment
to the Registration Statement and will not be used until the amendment
is effective, and that, in determining any liability under the 1933 Act,
each post effective amendment shall be deemed to be a new registration
statement for the securities offered therein, and the offering of the
securities at that time shall be deemed to be the initial bona fide
offering of them.
-4-
<PAGE> 248
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Boston and The Commonwealth of Massachusetts, on the 13th day of
February, 1996.
JOHN HANCOCK TAX-FREE BOND FUND
By:/s/ Edward J. Boudreau, Jr.
----------------------------
Edward J. Boudreau, Jr.
Chairman, Chief Executive Officer
and Trustee
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated:
<TABLE>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Edward J. Boudreau, Jr. Chairman, Chief ) February 13, 1996
- -------------------------- Executive Officer and )
Edward J. Boudreau, Jr. Trustee (Principal )
Executive Officer) )
)
)
/s/ James B. Little Senior Vice President ) February 13, 1996
- -------------------------- and Chief Financial )
James B. Little Officer (Principal )
Financial and )
Accounting Officer) )
)
Directors:
James F. Carlin* Trustee )
- ---------------- )
James F. Carlin )
)
William H. Cunningham* Trustee )
- ---------------------- )
William H. Cunningham )
</TABLE>
-5-
<PAGE> 249
<TABLE>
<S> <C> <C>
)
Charles L. Ladner* Trustee )
- ------------------ )
Charles L. Ladner )
)
Leo E. Linbeck, Jr.* Trustee )
- -------------------- )
Leo E. Linbeck, Jr. )
)
Patricia P. McCarter* Trustee )
- --------------------- )
Patricia P. McCarter )
)
Steven R. Pruchansky* Trustee )
- --------------------- )
Steven R. Pruchansky )
)
Norman H. Smith* Trustee )
- ---------------- )
Norman H. Smith )
)
John P. Toolan* Trustee )
- --------------- )
John P. Toolan )
)
- ---------------
*By:/s/ Thomas H. Drohan February 13, 1996
--------------------
Thomas H. Drohan,
Attorney-in-fact
</TABLE>
- 6 -
<PAGE> 250
EXHIBIT INDEX
<TABLE>
The following exhibits are filed as part of this Registration
Statement.
<CAPTION>
EXHIBIT NO. DESCRIPTION
<S> <C>
4. Agreement and Plan of Reorganization
between the Registrant and John Hancock
Tax-Exempt Income Fund (filed as Exhibit B to
Part A of this Registration Statement).
11. Opinion as to legality of shares, and
consent.
12. Draft of opinion as to tax matters, and
consent.
14. Consents of Ernst & Young LLP regarding the
audited financial statements and highlights
of the Registrant and John Hancock Tax-Exempt
Income Fund.
17. Declaration of the Registrant pursuant to
Rule 24f-2 under the Investment Company Act
of 1940.
18. Prospectus of John Hancock Tax-Exempt Income
Fund dated May 1, 1995 as supplemented December
11, 1995.
</TABLE>
- 7 -
<PAGE> 1
[LOGO] JOHN HANCOCK FUNDS
A Global Investment Management Firm
- -------------------------------------------------------------------------------
101 Huntington Avenue
Boston, Massachusetts 02199-7603
March 18, 1996
John Hancock Advisers, Inc.
John Hancock Tax-Free Bond Fund
101 Huntington Avenue
Boston, MA 02199
Ladies and Gentlemen:
In connection with the filing of a registration statement under the Securities
Act of 1933, as amended (the "Act"), on Form N-14, with respect to the shares
of beneficial interest of John Hancock Tax-Free Bond Fund, a Massachusetts
business trust (the "Fund"), it is the opinion of the undersigned that these
shares when issued will be legally issued, fully paid and nonassessable.
In connection with this opinion it should be noted that the Fund is an entity
of the type generally known as a "Massachusetts business trust." Under
Massachusetts law, shareholders of a Massachusetts business trust may be held
personally liable for the obligations of the trust. However, the Fund's
Declaration of Trust disclaims shareholder liability for obligations of the
Fund and indemnifies any shareholder of the Fund, with such indemnification to
be paid solely out of the assets of the Fund. Therefore, the shareholder's risk
is limited to circumstances in which the assets of the Fund are insufficient to
meet the obligations asserted against such assets.
The undersigned hereby consents to the filing of a copy of this opinion, as an
exhibit to the Fund's registration statement on Form N-14, with the Securities
and Exchange Commission and with the various state securities administrators.
Sincerely,
JOHN HANCOCK ADVISERS, INC.
/s/ Alfred P. Ouellette
Alfred P. Ouellette
Assistant Secretary
Member of Massachusetts Bar
APO/dmm
- -------------------------------------------------------------------------------
John Hancock Advisers, Inc. * John Hancock Funds, Inc.* John Hancock Investor
Services Corporation * The Patriot Group, Inc. [LOGO]
John Hancock Advisers International, Ltd. * NM Capital Management, Inc.
Sovereign Asset Management Corporation
* Member of National Association of Securities Dealers, Inc.
<PAGE> 1
May 3, 1996
Board of Trustees
John Hancock Tax-Exempt Income Fund
101 Huntington Avenue
Boston, Massachusetts 02199
Board of Trustees
John Hancock Tax-Free Bond Fund
101 Huntington Avenue
Boston, Massachusetts 02199
Dear Members of the Boards of Trustees:
You have requested our opinion regarding the federal income tax
consequences of the acquisition by John Hancock Tax-Free Bond Fund ("Acquiring
Fund") of all of the assets of John Hancock Tax-Exempt Income Fund ("Acquired
Fund") in exchange solely for (i) the assumption by Acquiring Fund of all of
the liabilities of Acquired Fund and (ii) the issuance of Class A and Class B
voting shares of beneficial interest of Acquiring Fund (the "Acquiring Fund
Shares") to Acquired Fund, followed by the distribution by Acquired Fund, in
liquidation of Acquired Fund, of the Acquiring Fund Shares to the shareholders
of Acquired Fund and the termination of Acquired Fund (the foregoing together
constituting the "reorganization" or the "transaction").
In rendering this opinion, we have examined and relied upon (i) the
prospectus for the Class A and Class B shares of Acquired Fund, dated May 1,
1995, as supplemented on December 11, 1995, (ii) the statement of additional
information for the Class A and Class B shares of Acquired Fund, dated May 1,
1995, (iii) the prospectus for the Class A and Class B shares of Acquiring
Fund, dated May 1, 1995, as supplemented November 28, 1995, (iv) the statement
of additional information for the Class A and Class B shares of Acquiring Fund,
dated May 1, 1995, (v) the registration statement on Form N-14 of Acquiring
Fund relating to the
<PAGE> 2
Board of Trustees
John Hancock Tax-Exempt Income Fund
John Hancock Tax-Free Bond Fund
May 3, 1996
Page 2
transaction (the "Registration Statement") filed with the
Securities and Exchange Commission (the "SEC") on February ____, 1996, (vi) the
proxy statement and prospectus relating to the transaction dated March 15, 1996
(the "Proxy Statement"), (vii) the Agreement and Plan of Reorganization, made
_______________, 1996, between Acquiring Fund and Acquired Fund (the
"Agreement"), (viii) the representation letters on behalf of Acquiring Fund and
Acquired Fund referred to below and (ix) such other documents as we deemed
appropriate. We have assumed that the parties to the Agreement have acted and
will act in accordance with the terms of the Agreement and all other documents
relating to the transaction.
The conclusions expressed herein represent our judgment regarding the
proper treatment of Acquiring Fund, Acquired Fund and the shareholders of
Acquired Fund on the basis of our analysis of the Internal Revenue Code of
1986, as amended (the "Code"), case law, Treasury regulations and the rulings
and other pronouncements of the Internal Revenue Service (the "Service") which
exist at the time this opinion is rendered. Such authorities are subject to
prospective or retroactive change, and we do not undertake any responsibility
to advise you of any such change. Our opinion represents our best judgment
regarding the issues presented and is not binding upon the Service or any
court. Moreover, our opinion does not provide any assurance that a position
taken in reliance on such opinion will not be challenged by the Service and
does not constitute any representation or warranty that such position, if so
challenged, will not be rejected by a court.
FACTS
-----
We understand the facts relating to the transaction to be as described
hereinafter. Acquiring Fund is a business trust established under the laws of
The Commonwealth of Massachusetts in 1989 and is registered as an open-end
investment company under the Investment Company Act of 1940, as amended (the
"1940 Act").
The investment objective of Acquiring Fund is to obtain as high a level
of interest income exempt from federal income taxes as is consistent with
preservation of capital. Acquiring Fund seeks to achieve its investment
objective by investing primarily in municipal bonds, notes and commercial
paper, the interest on which is exempt from federal income taxes. Acquiring
Fund may also enter into repurchase agreements and acquire certain taxable
money market securities, as described in its prospectus.
<PAGE> 3
Board of Trustees
John Hancock Tax-Exempt Income Fund
John Hancock Tax-Free Bond Fund
May 3, 1996
Page 3
Acquired Fund is a business trust established under the laws of The
Commonwealth of Massachusetts in 1976 and is registered as an open-end
investment company under the 1940 Act.
The investment objective of Acquired Fund is to provide as high a level
of dividend income exempt from federal income tax as is consistent with
preservation of capital and Acquired Fund's requirements for liquidity.
Acquired Fund seeks to achieve its objective by investing in a diversified
portfolio of municipal bonds and other securities, the interest on which is, at
the time of issue, excludable from gross income for federal income tax purposes
in the opinion of bond counsel to the issuer. Acquired Fund may also enter
into repurchase agreements and acquire certain other short-term, taxable
investments, as described in its prospectus.
The steps comprising the reorganization, as set forth in the Agreement,
are as follows:
(i) Acquired Fund will transfer to Acquiring Fund all of its
assets (consisting, without limitation, of portfolio securities and instruments,
dividend and interest receivables, cash and other assets). In exchange for the
assets transferred to it, Acquiring Fund will (A) assume all of the liabilities
of Acquired Fund (comprising all of its known and unknown liabilities and
referred to hereinafter as the "Acquired Fund Liabilities") and (B) issue
Acquiring Fund Shares to Acquired Fund that have an aggregate net asset value
equal to the value of the assets transferred to Acquiring Fund by Acquired
Fund, less the value of the Acquired Fund Liabilities assumed by Acquiring
Fund.
(ii) Promptly after the transfer of its assets to Acquiring
Fund, Acquired Fund will distribute in liquidation the Acquiring Fund Shares it
receives in the exchange to Acquired Fund shareholders pro rata in exchange for
their surrender of their shares of Acquired Fund ("Acquired Fund Shares"). In
these exchanges, holders of Acquired Fund Shares designated as Class A ("Class
A Acquired Fund Shares") will receive Acquiring Fund Shares designated as Class
A ("Class A Acquiring Fund Shares"), and holders of Acquired Fund Shares
designated as Class B ("Class B Acquired Fund Shares") will receive Acquiring
Fund Shares designated as Class B ("Class B Acquiring Fund Shares").
(iii) After such exchanges, liquidation and distribution, the
existence of Acquired Fund will be promptly terminated in accordance with
Massachusetts law.
<PAGE> 4
Board of Trustees
John Hancock Tax-Exempt Income Fund
John Hancock Tax-Free Bond Fund
May 3, 1996
Page 4
The Agreement and the transactions contemplated thereby were approved
by the Board of Trustees of Acquiring Fund at a meeting held on November 28,
1995. Acquiring Fund shareholders are not required and were not asked to
approve the transaction. The Agreement and the transactions contemplated
thereby were approved by the Board of Trustees of Acquired Fund at a meeting
held on December 11, 1995, subject to the approval of Acquired Fund
shareholders. Acquired Fund shareholders approved the transaction at a meeting
held on May 1, 1996.
Massachusetts law does not provide dissenters' rights for Acquired Fund
shareholders in the transaction. Additionally, it is the position of the
Division of Investment Management of the SEC that appraisal rights, in contexts
such as the reorganization, are inconsistent with Rule 22c-1 under the 1940 Act
and are therefore preempted and invalidated by such rule. Consequently,
Acquired Fund shareholders will not have dissenters' or appraisal rights in the
transaction.
Our opinions set forth below are subject to the following factual
assumptions being true and correct (including statements relating to future
actions and facts represented to be to the best knowledge of management,
whether or not known). Authorized representatives of Acquiring Fund and
Acquired Fund have represented to us by letters of even date herewith that the
following assumptions are true and correct:
(a) Acquiring Fund has no plan or intention to redeem or otherwise
reacquire any of the Acquiring Fund Shares received by shareholders of Acquired
Fund in the transaction except in connection with its legal obligation under
Section 22(e) of the 1940 Act as a registered open-end investment company to
redeem its own shares.
(b) After the transaction, Acquiring Fund will continue the historic
business of Acquired Fund and will use all of the assets acquired from Acquired
Fund, which are Acquired Fund's historic business assets, i.e., assets not
acquired as part of or in contemplation of the transaction, in the ordinary
course of a business.
(c) Acquiring Fund has no plan or intention to sell or otherwise
dispose of any assets of Acquired Fund acquired in the transaction, except for
dispositions made in the ordinary course of its business (i.e., dispositions
resulting from investment decisions made after the reorganization on the basis
of investment considerations independent of the reorganization) or to maintain
<PAGE> 5
Board of Trustees
John Hancock Tax-Exempt Income Fund
John Hancock Tax-Free Bond Fund
May 3, 1996
Page 5
its qualification as a regulated investment company under Subchapter M of the
Code.
(d) The shareholders of Acquiring Fund and the shareholders of
Acquired Fund will bear their respective expenses, if any, in connection with
the transaction.
(e) Acquiring Fund and Acquired Fund will each bear its own expenses
incurred in connection with the transaction. Any liabilities of Acquired Fund
attributable to such expenses that remain unpaid on the closing date of the
transaction and are assumed by Acquiring Fund in the transaction are
attributable to Acquired Fund's expenses that are solely and directly related
to the transaction in accordance with the guidelines established in Rev. Rul.
73-54, 1973-1 C.B. 187.
(f) There is no indebtedness between Acquiring Fund and Acquired Fund.
(g) Acquired Fund has elected to be treated as a regulated investment
company under Subchapter M of the Code, has qualified as a regulated investment
company for each taxable year since its inception, and qualifies as such for
its final taxable year ending on the closing date of the transaction.
(h) Acquiring Fund has elected to be treated as a regulated investment
company under Subchapter M of the Code, has qualified as a regulated investment
company for each taxable year since its inception, and qualifies as such as of
the date of the transaction.
(i) Neither Acquiring Fund nor Acquired Fund is under the jurisdiction
of a court in a Title 11 or similar case within the meaning of Section
368(a)(3)(A) of the Code.
(j) Acquiring Fund does not own and since its inception has not owned,
directly or indirectly, any shares of Acquired Fund.
(k) Acquiring Fund will not pay cash in lieu of fractional shares in
connection with the transaction.
(l) As of the date of the transaction, the fair market value of the
Acquiring Fund Shares issued to Acquired Fund in exchange for the assets of
Acquired Fund is approximately equal to the fair market value of the assets of
Acquired Fund received by Acquiring Fund, minus the value of the Acquired Fund
Liabilities assumed by Acquiring Fund.
<PAGE> 6
Board of Trustees
John Hancock Tax-Exempt Income Fund
John Hancock Tax-Free Bond Fund
May 3, 1996
Page 6
(m) Acquired Fund shareholders will be in control (within the meaning
of Sections 368(a)(2)(H) and 304(c) of the Code, which provide that control
means the ownership of shares possessing at least 50% of the total combined
voting power of all classes of shares that are entitled to vote or at least 50%
of the total value of shares of all classes) of Acquiring Fund after the
transaction, and to the best knowledge of management of Acquired Fund, there is
no intention on the part of any shareholders of Acquired Fund to redeem, sell,
exchange, or otherwise dispose of a number of the shares of Acquiring Fund
received in the transaction that would affect the retention of control of
Acquiring Fund by former shareholders of Acquired Fund after consummation of
the transaction.
(n) At the time of the transaction, Acquiring Fund does not have
outstanding any warrants, options, convertible securities, or any other type of
right pursuant to which any person could acquire shares of Acquiring Fund that,
if exercised or converted, would affect the acquisition or retention of control
(within the meaning of Sections 368(a)(2)(H) and 304(c) of the Code) of
Acquiring Fund by the shareholders of Acquired Fund.
(o) The principal business purposes of the transaction are to combine
the assets of Acquiring Fund and Acquired Fund in order to capitalize on
economies of scale in expenses such as the costs of accounting, legal, transfer
agency, insurance, custodial, and administrative services, to eliminate the
potential adverse effects on each fund's asset growth of competing with the
other fund, and to increase diversification.
(p) As of the date of the transaction, the fair market value of the
Class A Acquiring Fund Shares received by each holder of Class A Acquired Fund
Shares is approximately equal to the fair market value of the Class A Acquired
Fund Shares surrendered by such shareholder, and the fair market value of the
Class B Acquiring Fund Shares received by each holder of Class B Acquired Fund
Shares is approximately equal to the fair market value of the Class B Acquired
Fund Shares surrendered by such shareholder.
(q) There is no plan or intention on the part of any shareholder of
Acquired Fund that owns beneficially 5% or more of the Acquired Fund Shares
and, to the best knowledge of management of Acquired Fund, there is no plan or
intention on the part of the remaining shareholders of Acquired Fund to sell,
redeem, exchange or otherwise dispose of a number of the Acquiring Fund Shares
received in the transaction that would reduce the aggregate ownership of the
Acquiring Fund Shares by former Acquired Fund shareholders to a number of
shares having a value, as of the date
<PAGE> 7
Board of Trustees
John Hancock Tax-Exempt Income Fund
John Hancock Tax-Free Bond Fund
May 3, 1996
Page 7
of the transaction, of less than fifty percent (50%) of the value of
all of the formerly outstanding Acquired Fund Shares as of the same date.
Shares of Acquired Fund and Acquiring Fund held by Acquired Fund shareholders
and sold, redeemed, exchanged or otherwise disposed of prior or subsequent to
the transaction as part of the plan of reorganization are taken into account
for purposes of this representation.
(r) Acquired Fund assets transferred to Acquiring Fund comprise at
least ninety percent (90%) of the fair market value of the net assets and at
least seventy percent (70%) of the fair market value of the gross assets held
by Acquired Fund immediately prior to the transaction. For purposes of this
representation, amounts used by Acquired Fund to pay its outstanding
liabilities, including reorganization expenses, and all redemptions and
distributions (except for redemptions in the ordinary course of business upon
demand of a shareholder that Acquired Fund is required to make as an open-end
investment company pursuant to Section 22(e) of the 1940 Act and regular,
normal dividends, which dividends include any final distribution of previously
undistributed investment company taxable income and net capital gain for
Acquired Fund's final taxable year ending on the closing date of the
transaction) made by Acquired Fund immediately preceding the transaction are
taken into account as assets of Acquired Fund held immediately prior to the
transaction.
(s) The Acquired Fund Liabilities assumed by Acquiring Fund plus the
liabilities, if any, to which the transferred assets are subject were incurred
by Acquired Fund in the ordinary course of its business or are expenses of the
transaction.
(t) The fair market value of the Acquired Fund assets transferred to
Acquiring Fund equals or exceeds the sum of the Acquired Fund Liabilities
assumed by Acquiring Fund and the amount of liabilities, if any, to which the
transferred assets are subject.
(u) The total adjusted basis of the Acquired Fund assets transferred
to Acquiring Fund equals or exceeds the sum of the Acquired Fund Liabilities
assumed by Acquiring Fund and the amount of liabilities, if any, to which the
transferred assets are subject.
(v) Acquired Fund does not pay compensation to any shareholder-
employee.
<PAGE> 8
Board of Trustees
John Hancock Tax-Exempt Income Fund
John Hancock Tax-Free Bond Fund
May 3, 1996
Page 8
OPINION
-------
On the basis of and subject to the foregoing and in reliance upon the
representations described above, and provided that any statement of fact
represented to be made to the best knowledge of management of Acquired Fund or
Acquiring Fund is in fact true and correct (whether or not known), we are of
the opinion that
(a) The acquisition by Acquiring Fund of all of the assets of Acquired
Fund solely in exchange for the issuance of Acquiring Fund Shares to Acquired
Fund and the assumption of all of the Acquired Fund Liabilities by Acquiring
Fund, followed by the distribution by Acquired Fund, in liquidation of Acquired
Fund, of Acquiring Fund Shares to Acquired Fund shareholders in exchange for
their Acquired Fund Shares and the termination of Acquired Fund, will
constitute a "reorganization" within the meaning of Section 368(a)(1)(D) of the
Code. Acquiring Fund and Acquired Fund will each be "a party to a
reorganization" within the meaning of Section 368(b) of the Code.
(b) No gain or loss will be recognized by Acquired Fund upon (i) the
transfer of all of its assets to Acquiring Fund solely in exchange for the
issuance of Acquiring Fund Shares to Acquired Fund and the assumption of all of
the Acquired Fund Liabilities by Acquiring Fund and (ii) the distribution by
Acquired Fund of such Acquiring Fund Shares to the shareholders of Acquired
Fund (Sections 361(a) and 361(c) of the Code).
(c) No gain or loss will be recognized by Acquiring Fund upon the
receipt of the assets of Acquired Fund solely in exchange for the issuance of
Acquiring Fund Shares to Acquired Fund and the assumption of all of the
Acquired Fund Liabilities by Acquiring Fund (Section 1032(a) of the Code).
(d) The basis of the assets of Acquired Fund acquired by Acquiring
Fund will be, in each instance, the same as the basis of such assets in the
hands of Acquired Fund immediately prior to the transfer (Section 362(b) of the
Code).
(e) The tax holding period of the assets of Acquired Fund in the hands
of Acquiring Fund will, in each instance, include Acquired Fund's tax holding
period for those assets (Section 1223(2) of the Code).
(f) The shareholders of Acquired Fund will not recognize gain or loss
upon the exchange of all of their Acquired Fund Shares solely for Acquiring
Fund Shares as part of the transaction (Section 354(a)(l) of the Code).
<PAGE> 9
Board of Trustees
John Hancock Tax-Exempt Income Fund
John Hancock Tax-Free Bond Fund
May 3, 1996
Page 9
(g) The basis of the Acquiring Fund Shares received by the Acquired
Fund shareholders in the transaction will be the same as the basis of the
Acquired Fund Shares surrendered in exchange therefor (Section 358(a)(1) of the
Code).
(h) The tax holding period of the Acquiring Fund Shares received by
Acquired Fund shareholders will include, for each shareholder, the tax holding
period for the Acquired Fund Shares surrendered in exchange therefor, provided
the Acquired Fund Shares were held as capital assets on the date of the
exchange (Section 1223(1) of the Code).
No opinion is expressed or implied regarding the federal income tax
consequences to Acquiring Fund, Acquired Fund or Acquired Fund shareholders of
any conditions existing at the time of, effects resulting from, or other
aspects of the transaction except as expressly set forth above.
Very truly yours,
Hale and Dorr
<PAGE> 1
Consent of Ernst & Young LLP, Independent Auditors
We consent to the reference to our firm under the captions "The Fund's
Financial Highlights" and "Experts" in the Combined Prospectus/Proxy Statement
in the Registration Statement on Form N-14, dated February 15, 1996, of John
Hancock Tax-Free Bond Fund; to the reference under the caption "Independent
Auditors" in the Statement of Additional Information, dated May 1, 1995, for
the John Hancock Tax-Free Bond Fund, included in this form N-14; and to the
reference under the caption "Independent Auditors" in the Statement of
Additional Information, dated May 1, 1995, for the John Hancock Tax-Exempt
Income Fund, included in this Form N-14.
We also consent to the use of our report with respect to the financial
statements and financial highlights of John Hancock Tax-Free Bond Fund, dated
January 31, 1996, included in this Form N-14; to the use of our report with
respect to the financial statements and financial highlights of John Hancock
Tax-Exempt Income Fund, dated January 31, 1996, included in this form N-14; to
the incorporation by reference of our report, dated February 3, 1995, on the
financial statements and financial highlights of the John Hancock Tax-Free Bond
Fund; to the incorporation by reference of our report, dated February 13, 1995,
on the financial statements and financial highlights of the John Hancock Tax
Exempt-Income Fund; and to the reference to our firm under the caption "The
Funds Financial Highlights" in the Prospectus of John Hancock Tax-Exempt Income
Fund, dated May 1, 1995, included in this form N-14.
Ernst & Young LLP
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
February 15, 1996
<PAGE> 1
EXHIBIT 17
Registration No. 33-32246
As filed on July 20, 1990
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 / X /
- -------------------------------------------------------
Pre-Effective Amendment No. _______ / /
Post-Effective Amendment No. 1 / X /
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 / X /
- ---------------------------------------------------------------
Amendment No. 4 / X /
TRANSAMERICA TAX-FREE BOND FUND
(Exact Name of Registrant as Specified in Charter)
1000 Louisiana, Houston, Texas 77002
(Address of Principal Executive Offices)
Registrant's Telephone Number, including Area Code: (713) 751-2400
Thomas R. Powers
1000 Louisiana
Houston, Texas 77002
(Name and Address of Agent for Service)
----------------------
Copies to:
Kenneth S. Gerstein, Esq. Robert L. Stillwell, Esq.
Gordon Hurwitz Butowsky Weitzen Baker & Botts
Shalov & Wein 3000 One Shell Plaza
101 Park Avenue Suite 3121
New York, New York 10178 Houston, Texas 77002
Approximate Date of Proposed Public Offering: As soon as practicable after
this Registration Statement becomes effective.
It is proposed that this filing will become effective:
X immediately upon filing pursuant to paragraph (b)
___ on [date] pursuant to paragraph (b)
___ 60 days after filing pursuant to paragraph (a)
___ on [date] pursuant to paragraph (a) of rule 485
----------------------
Registrant previously elected, pursuant to Rule 24f-2 (b)(2) under the
Investment Company Act of 1940, to register an indefinite number of its shares
of beneficial interest, for sale under the Securities Act of 1933 and will file
its Notice for the current fiscal year ending December 31, 1990.
<PAGE> 1
JOHN HANCOCK TAX-EXEMPT INCOME FUND
SUPPLEMENT TO PROSPECTUS DATED MAY 1, 1995
On December 11, 1995, the Trustees of the John Hancock Tax-Exempt Income
Fund (the "Fund") voted to recommend that the shareholders approve a tax-free
reorganization of the Fund, as described below.
Under the terms of the reorganization, subject to shareholder approval at a
shareholder meeting scheduled to be held in April, 1996, the Fund would
transfer all of its assets and liabilities to John Hancock Tax-Free Bond Fund
("Tax-Free Bond Fund") in a tax-free exchange for shares of equal value of
Tax-Free Bond Fund. Further information regarding the proposed reorganization
will be contained in a proxy statement and prospectus which is scheduled to be
mailed to shareholders during March, 1996.
Effective March 6, 1996, John Hancock Tax-Exempt Income Fund will be closed
to new accounts (except for participants in existing Qualified Retirement
Plans).
December 11, 1995
2300S 12/95
<PAGE> 2
JOHN HANCOCK
TAX-EXEMPT
INCOME FUND
CLASS A AND CLASS B SHARES
PROSPECTUS
MAY 1, 1995
<TABLE>
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
<CAPTION>
Page
--
<S> <C>
Expense Information .................................................... 2
The Fund's Financial Highlights ........................................ 3
Investment Objective and Policies ...................................... 5
Organization and Management of the Fund ................................ 8
Alternative Purchase Arrangements ...................................... 9
The Fund's Expenses .................................................... 11
Dividends and Taxes .................................................... 11
Performance ............................................................ 12
How to Buy Shares ...................................................... 13
Share Price ............................................................ 15
How to Redeem Shares ................................................... 19
Additional Services and Programs ....................................... 22
</TABLE>
This Prospectus sets forth information about John Hancock Tax-Exempt Income
Fund (the "Fund"), a diversified fund, that you should know before investing.
Please read and retain it for future reference.
Additional information about the Fund has been filed with the
Securities and Exchange Commission (the "SEC"). You can obtain a copy of the
Fund's Statement of Additional Information, dated May 1, 1995, which is
incorporated by reference into this Prospectus, free of charge by writing or
telephoning: John Hancock Investor Services Corporation, P.O. Box 9116, Boston,
Massachusetts 02205-9116, 1-800-225-5291, (1-800-554-6713 TDD).
SHARES OF THE FUND ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR
ENDORSED BY, ANY BANK, AND THE SHARES ARE NOT FEDERALLY INSURED BY THE FEDERAL
DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<PAGE> 3
EXPENSE INFORMATION
The purpose of the following information is to help you understand the
various fees and expenses that you will bear, directly or indirectly, when you
purchase Fund shares. The operating expenses included in the table and
hypothetical example below are based on fees and expenses of the Fund's Class A
and Class B shares for the fiscal year ended December 31, 1994, adjusted to
reflect current fees and expenses. Actual fees and expenses in the future may be
greater or less than those indicated.
<TABLE>
<CAPTION>
CLASS A CLASS B
SHARES SHARES
------- -------
<S> <C> <C>
SHAREHOLDER TRANSACTION EXPENSES
Maximum sales charge imposed on purchases (as a percentage of
offering price) ................................................. 4.50%<F1> None
Maximum sales charge imposed on reinvested dividends ............ None None
Maximum deferred sales charge ................................... None<F1> 5.00%
Redemption fee<F3> .............................................. None None
Exchange fee .................................................... None None
ANNUAL FUND OPERATING EXPENSES
(as a percentage of average net assets)
Management fee .................................................. 0.55% 0.55%
12b-1 fee<F2> ................................................... 0.30% 1.00%
Other expenses .................................................. 0.22% 0.27%
Total Fund operating expenses ................................... 1.07% 1.82%
<FN>
<F1> No sales charge is payable at the time of purchase on investments in Class
A shares of $1 million or more, but for a contingent deferred sales charge
may be imposed on these investments, as described under the caption "Share
Price," in the event of certain redemption transactions within one year of
purchase.
<F2> The amount of the 12b-1 fee used to cover service expenses will be up to
0.25% of the Fund's average net assets, and the remaining portion will be
used to cover distribution expenses. See "The Fund's Expenses."
<F3> Redemption by wire fee (currently $4.00) not included.
</TABLE>
<TABLE>
<CAPTION>
EXAMPLE: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
You would pay the following expenses for the indicated
period of years on a hypothetical $1,000 investment,
assuming a 5% annual return: $55 $78 $101 $170
Class A shares
Class B shares
--Assuming complete redemption at end of period .... $68 $87 $119 $194
--Assuming no redemption ........................... $18 $57 $ 99 $194
</TABLE>
(This example should not be considered a representation of past or future
expenses. Actual expenses may be greater or less than those shown.)
The Fund's payment of a distribution fee may result in a long-term
shareholder indirectly paying more than the economic equivalent of the maximum
front-end sales charge permitted under the National Association of Securities
Dealers Rules of Fair Practice.
The management and 12b-1 fees referred to above are more fully explained in
this Prospectus under the caption "The Fund's Expenses" and in the Statement of
Additional Information under the captions "Investment Advisory and Other
Services" and "Distribution Contract."
<PAGE> 4
THE FUND'S FINANCIAL HIGHLIGHTS
The following table of Financial Highlights has been audited by Ernst &
Young LLP, the Fund's independent auditors,whose unqualified report is included
in the Fund's 1994 Annual Report and is included in the Statement of Additional
Information. Further information about the performance of the Fund is contained
in the Fund's Annual Report to shareholders that may be obtained free of charge
by writing or telephoning John Hancock Investor Services Corporation ("Investor
Services"), at the address or telephone number listed on the front page of this
Prospectus.
Selected data for each class of shares outstanding throughout each period
indicated is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------------------
1994 1993 1992 1991 1990 1989 1988 1987 1986 1985
CLASS A ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net Asset Value, Beginning of
Period .................... $11.21 $10.96 $11.01 $10.59 $10.68 $10.49 $10.07 $11.10 $10.35 $ 9.32
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Investment Income ....... 0.57 0.58 0.63 0.68 0.68 0.72 0.72 0.71 0.77 0.81
Net Realized and Unrealized
Gain (Loss) on Investments
and Financial Futures
Contracts ................. (1.22) 0.66 0.26 0.57 (0.05) 0.20 0.40 (0.67) 1.23 1.10
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total from Investment
Operations ............ (0.65) 1.24 0.89 1.25 0.63 0.92 1.12 0.04 2.00 1.91
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Less Distributions:
Dividends from Net
Investment Income ....... (0.57) (0.58) (0.63) (0.68) (0.68) (0.73) (0.70) (0.77) (0.75) (0.88)
Distributions from Net
Realized Gain on
Investments Sold and
Financial Futures
Contracts ............... (0.03) (0.41) (0.31) (0.15) (0.04) -- -- (0.30) (0.50) --
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total Distributions ..... (0.60) (0.99) (0.94) (0.83) (0.72) (0.73) (0.70) (1.07) (1.25) (0.88)
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Net Asset Value, End of
Period .................... $ 9.96 $11.21 $10.96 $11.01 $10.59 $10.68 $10.49 $10.07 $11.10 $10.35
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
Total Investment Return at
Net Asset Value(c) ........ (5.90%) 11.53% 8.35% 12.18% 6.15% 9.06% 11.38% 0.47% 20.42% 21.51%
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Ratios and Supplemental Data
Net Assets, End of Period
(000's omitted) ........... $467,475 $541,281 $481,730 $422,311 $377,738 $382,421 $361,011 $357,624 $341,670 $238,558
Ratio of Expenses to Average
Net Assets ................ 1.11% 1.27% 1.28% 1.21% 1.23% 0.94% 0.84% 0.78% 0.71% 0.72%
Ratio of Net Investment
Income to Average Net
Assets .................... 5.43% 5.06% 5.71% 6.23% 6.43% 6.76% 6.95% 6.96% 7.17% 8.30%
Portfolio Turnover Rate ..... 74% 81% 93% 56% 59% 44% 94% 129% 114% 131%
</TABLE>
<PAGE> 5
<TABLE>
FOR THE PERIOD
JANUARY 3, 1994
(COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1994
----------------------------
<S> <C>
CLASS B
Net Asset Value, Beginning of Period ................ $11.17(a)
------
Net Investment Income ............................... 0.49
Net Realized and Unrealized Loss on Investments and
Financial Futures Contracts ......................... (1.19)
------
Total from Investment Operations ................ (0.70)
------
Less Distributions:
Dividends from Net Investment Income .............. (0.49)
Distributions from Net Realized Gain on Investments
Sold and Financial Futures Contracts ................ (0.03)
------
Total Distributions ............................. (0.52)
------
Net Asset Value, End of Period ...................... $ 9.95
======
Total Investment Return at Net Asset Value (c) ...... (6.23%)(b)
Ratios and Supplemental Data
Net Assets, End of Period (000's Omitted) .......... $3,974
Ratio of Expenses to Average Net Assets ............. 1.83%*
Ratio of Net Investment Income to Average Net Assets 4.88%*
Portfolio Turnover Rate ............................. 74%
* On an annualized basis.
(a) Initial price to commence operations.
(b) Not annualized.
(c) Without the expense reduction, total investment return would have been
lower.
</TABLE>
<PAGE> 6
INVESTMENT OBJECTIVE AND POLICIES
THE FUND'S INVESTMENT OBJECTIVE IS TO SEEK AS HIGH A LEVEL OF DIVIDEND INCOME
EXEMPT FROM FEDERAL INCOME TAX AS IS CONSISTENT WITH PRESERVATION OF CAPITAL.
The Fund's investment objective is to provide as high a level of dividend income
exempt from Federal income tax as is consistent with preservation of capital and
the Fund's requirements for liquidity. The Fund seeks to achieve its objective
by investing in a diversified portfolio of municipal bonds and other securities
(including certain industrial development or private activity bonds), the
interest on which is, at the time of issue, excludable from gross income for
Federal income tax purposes in the opinion of bond counsel to the issuer (all of
which are commonly known as "Tax-Exempt Bonds"). There is no assurance that the
Fund will achieve its investment objective.
The Fund's assets may consist of Tax-Exempt Bonds, short-term municipal debt
instruments (Tax-Exempt Bonds issued for terms of less than one year), cash,
receivables, and short-term taxable investments, which include securities such
as (1) U.S. Treasury obligations; (2) obligations of agencies and
instrumentalities of the United States government; and (3) money market
instruments, such as domestic bank certificates of deposit, repurchase
agreements, finance company and other corporate commercial paper and bankers'
acceptances. It is not expected that the portion of the Fund's total assets
consisting of short-term taxable investments will exceed 15%.
It is expected that at least 85% of the Fund's total assets will consist of
Tax-Exempt Bonds, the interest on which is not treated as a tax preference item
under the Federal alternative minimum tax; and that at least 65% of the Fund's
investments in Tax-Exempt Bonds will consist of bonds falling into either of two
categories:
1. Tax-Exempt Bonds that, at the time of investment, have a rating within the
three highest ratings determined by Moody's Investors Service, Inc.
("Moody's") (Aaa, Aa, and A), by Standard and Poor's Ratings Group ("Standard
& Poor's") (AAA, AA, and A) or by Fitch Investor Services, Inc. ("Fitch")
(AAA, AA, A), and
2. Tax-Exempt Bonds issued for terms of less than one year (short-term municipal
debt instruments) that (a) have a rating within the three highest ratings as
determined by Moody's (MIG 1, MIG 2, or MIG 3), by Standard & Poor's
(SP-1,SP-2, SP-3) or by Fitch (F-1, F-2, F-3) or (b) bear no rating but are,
in the judgment of John Hancock Advisers, Inc. ("the Adviser"), of equivalent
quality to a MIG 3, SP-3 or F-3 rating or better. Not more than 25% of the
value of the Fund's total assets will under normal market conditions, be
invested in short-term Tax-Exempt instruments.
The portion of the Fund's investment in Tax-Exempt Bonds not falling within
either of the two foregoing categories may consist of Tax-Exempt Bonds that, at
the time of investment, are rated within the next three highest ratings (Baa,
Ba, B or BBB, BB or B) or their equivalent, and unrated Tax-Exempt Bonds of
comparable quality as determined by the Adviser. The Fund's investment in
long-term Tax-Exempt Bonds that are not rated will not, however, exceed 20% of
the Fund's investments in Tax-Exempt Bonds. It will be limited to those which,
in the judgment of the Adviser, are of equivalent quality to Tax-Exempt Bonds in
the rating categories noted above. Bonds which have a rating of BBB or lower,
Baa or lower or an equivalent rating, and unrated bonds of comparable quality,
are considered speculative. While generally providing greater income than
investments in higher quality securities, these bonds involve greater risk of
principal and income loss, including the possibility of default. These bonds may
have greater price volatility, especially during periods of economic uncertainty
or change. Bonds rated B are currently meeting debt service requirements but
provide a limited margin of safety and are vulnerable to default in the event of
adverse business, financial or economic conditions. The bonds are considered
highly speculative. In addition, the market for bonds rated BBB, Baa or lower
may be less liquid than the market for higher rated securities. Therefore, the
Adviser's judgment may at times play a greater role in the performance and
valuation of the Fund's investments in these bonds.
The two principal classifications of municipal securities in which the Fund may
invest are "general obligation" and "revenue" bonds. General obligation bonds
<PAGE> 7
are secured by the issuer's pledge of its full faith and credit and taxing power
for the payment of principal and interest. Revenue bonds are payable only from
the revenues derived from a particular facility or class of facilities or a
specific revenue source, and generally are not payable from the unlimited
revenues of the issuer. The Fund may also invest up to 5% of its net assets in
certificates of participation in municipal lease obligations.
The Fund's investments in Tax-Exempt Bonds entail certain risks. These include
adverse income and principal value fluctuation associated with economic
conditions affecting the market for Tax-Exempt Bonds in general, the
creditworthiness of issuers and guarantors of these securities and the
facilities financed by them; and adverse interest rate changes. The value of the
Fund's investments in Tax-Exempt Bonds, and thus the net asset value of the
Fund's shares, can generally be expected to vary inversely with changes in
interest rates.
It is expected that, under normal market conditions, the Fund's average
portfolio maturity will range from 20 to 25 years. Portfolio securities with
longer maturities generally are more susceptible to adverse interest rate
changes than securities with shorter maturities.
LENDING OF SECURITIES. The Fund may lend portfolio securities to brokers,
dealers, and financial institutions if the loan is collateralized by cash or
U.S. Government securities according to applicable regulatory requirements. The
Fund may reinvest any cash collateral in short-term securities. When the Fund
lends portfolio securities, there is a risk that the borrower may fail to return
the securities. As a result, the Fund may incur a loss or, in the event of the
borrower's bankruptcy, the Fund may be delayed in or prevented from liquidating
the collateral. It is a fundamental policy of the Fund not to lend portfolio
securities having a total value exceeding 33 1/3% of its total assets.
THE FUND MAY EMPLOY CERTAIN INVESTMENT STRATEGIES TO ACHIEVE ITS INVESTMENT
OBJECTIVE.
RESTRICTED SECURITIES. The Fund may purchase restricted securities, including
those that can be offered and sold to "qualified institutional buyers" under
Rule 144A under the Securities Act of 1933 (the "Securities Act"). The Trustees
will monitor the Fund's investments in these securities, focusing on certain
factors, including valuation, liquidity and availability of information.
Purchases of restricted securities are subject to an investment restriction
limiting all the Fund's illiquid securities to not more than 15% of its net
assets.
REPURCHASE AGREEMENTS, FORWARD COMMITMENTS AND WHEN-ISSUED SECURITIES. The Fund
may enter into repurchase agreements and may purchase securities on a forward
commitment or when-issued basis. In a repurchase agreement, the Fund buys a
security subject to the right and obligation to sell it back to the seller at a
higher price. These transactions must be fully collateralized at all times, but
involve some credit risk to the Fund if the other party defaults on its
obligation and the Fund is delayed in or prevented from liquidating the
collateral. The Fund will segregate in a separate account cash or liquid, high
grade debt securities equal in value to its forward commitments and when-issued
securities. Purchasing securities for future delivery or on a when-issued basis
may increase the Fund's overall investment exposure and involve a risk of loss
if the value of the securities declines before the settlement date.
FUTURES CONTRACTS AND OPTIONS ON FUTURES. The Fund may buy and sell municipal
bond index futures contracts, interest rate futures contracts and related
options. It may make these investments either to hedge against changes in
securities prices, interest rates and other market conditions, or for
speculative purposes. Transactions in these contracts involve a risk of loss or
depreciation due to unanticipated adverse changes in interest rates or
securities prices. The loss on futures contracts and written options may exceed
the Fund's initial investment in these contracts. In addition, the Fund may lose
the entire premium paid for purchased options that cannot be profitably
exercised by the Fund. The Fund's success in using futures and options on
futures to hedge portfolio assets depends on the degree of price correlation
between the derivative instrument and the hedged asset. The Fund's futures
contracts and options on futures will be traded on a U.S. commodity exchange or
<PAGE> 8
board of trade. Futures contracts and options on futures may become illiquid
under adverse market conditions and may be subject to trading limitations
imposed by a commodity exchange. The Fund will not engage in a futures or
options transaction for speculative purposes, if immediately thereafter, the sum
of initial margin deposits on existing positions and premiums required to
establish these speculative positions exceeds 5% of the Fund's net assets.
VARIABLE AND FLOATING-RATE OBLIGATIONS. The Fund may invest in variable rate and
floating rate obligations on which the interest may fluctuate based on changes
in market rates. The interest rates payable on variable rate obligations are
adjusted at designated periodic intervals. The interest rates payable on
floating rate obligations are adjusted whenever there is a change in the market
interest rate on which the interest payable is based.
SHORT-TERM TRADING. Short-term trading means the purchase and subsequent sale of
a security after it has been held for a relatively brief period of time. The
Fund engages in short-term trading in response to changes in interest rates or
other economic trends and developments, or to take advantage of yield
disparities between various fixed-income securities in order to realize capital
gains or improve income. Portfolio turnover rates of the Fund for recent years
are shown in the section "The Fund's Financial Highlights."
CERTAIN INVESTMENTS MAY BE SUBJECT TO THE ALTERNATIVE MINIMUM TAX.
The Fund may invest in certain types of Tax-Exempt Bonds on which the interest
income is treated as an item of tax preference for purposes of the Federal
alternative minimum tax. To the extent the Fund invests in these Tax-Exempt
Bonds as described above, shareholders will be required to treat as a Federal
income tax preference item that part of the Fund's distributions that is derived
from interest on these Tax-Exempt Bonds. Dividends derived from interest income
from all Tax-Exempt Bonds are included in corporate "adjusted current earnings"
for purposes of computing the alternative minimum taxable income of corporate
shareholders of the Fund.
THE FUND FOLLOWS CERTAIN POLICIES, WHICH MAY HELP TO REDUCE INVESTMENT RISK.
INVESTMENT RESTRICTIONS. The Fund has adopted certain investment restrictions
that are detailed in the Statement of Additional Information, where they are
classified as fundamental or non-fundamental. The Fund's investment restrictions
designated as fundamental may not be changed without shareholder approval. The
Fund's investment objective and all other investment policies and restrictions,
however, are nonfundamental and can be changed by a vote of the Trustees without
shareholder approval. These changes may result in the Fund having an investment
objective different from the objective you considered appropriate at the time of
your investment. The Fund's portfolio turnover rates for recent years are shown
in the section "The Fund's Financial Highlights."
BROKERS ARE CHOSEN ON BEST PRICE AND EXECUTION.
When choosing brokerage firms to carry out the Fund's transactions, the Adviser
gives primary consideration to execution at the most favorable price, taking
into account the broker's professional ability and quality of service.
Consideration may also be given to the broker's sales of Fund shares. Pursuant
to procedures established by the Trustees, the Adviser may place securities
transactions with brokers affiliated with the Adviser. These brokers include
Tucker Anthony Incorporated, John Hancock Distributors, Inc. and Sutro &
Company, Inc. which are indirectly owned by John Hancock Mutual Life Insurance
Company, which in turn indirectly owns the Adviser.
ORGANIZATION AND MANAGEMENT OF THE FUND
THE TRUSTEES ELECT OFFICERS AND RETAIN THE INVESTMENT ADVISER WHO IS RESPONSIBLE
FOR THE DAY-TO-DAY OPERATIONS OF THE FUND, SUBJECT TO THE TRUSTEES' POLICIES AND
SUPERVISION.
The Fund is a diversified open-end management investment company organized as a
Massachusetts business trust in 1976. The Fund has an unlimited number of
authorized shares of beneficial interest. The Fund's Declaration of Trust
<PAGE> 9
permits the Trustees, without shareholder approval, to create and classify
shares of beneficial interest into separate series of the Fund. As of the date
of this Prospectus, the Trustees have not authorized the creation of any new
series of the Fund. Although additional series may be added in the future, the
Trustees have no current intention of creating additional series of the Fund.
The Trust's Declaration of Trust also permits the Trustees to classify and
reclassify any series or portfolio of shares into one or more classes.
Accordingly, the Trustees have authorized the issuance of two classes of the
Fund, designated Class A and Class B. The shares of each class represent an
interest in the same portfolio of investments of the Fund. Each class has equal
rights as to voting, redemption, dividends and liquidation. However, each class
bears different distribution and transfer agent fees and other expenses. Also,
Class A and Class B shareholders have exclusive voting rights with respect to
their distribution plans.
Shareholders have certain rights to remove Trustees. The Fund is not required
and does not intend to hold annual shareholder meetings, although special
meetings may be held for such purposes as electing or removing Trustees,
changing fundamental restrictions and policies or approving a management
contract. The Fund, under certain circumstances, will assist in shareholder
communications with other shareholders.
JOHN HANCOCK ADVISERS, INC. ADVISES INVESTMENT COMPANIES HAVING A TOTAL ASSET
VALUE OF MORE THAN $13 BILLION.
The Adviser was organized in 1968 and is a wholly-owned indirect subsidiary of
the John Hancock Mutual Life Insurance Company, a financial services company. It
provides the Fund, and other investment companies in the John Hancock group of
funds, with investment research and portfolio management services. John Hancock
Funds, Inc. ("John Hancock Funds") distributes shares for all of the John
Hancock funds through selected broker-dealers ("Selling Brokers"). Certain Fund
officers are also officers of the Adviser and John Hancock Funds. Pursuant to an
order granted by the Securities and Exchange Commission, the Fund has adopted a
deferred compensation plan for its independent Trustees which allows Trustees'
fees to be invested by the Fund in other John Hancock funds.
Thomas C. Goggins is Senior Vice President and portfolio manager of the Fund.
Mr. Goggins heads up John Hancock's team of municipal bond portfolio managers
and analysts. He joined the Adviser in 1995. Previously to that date, Mr.
Goggins was a municipal bond portfolio manager at Putnam Investments and
Transamerica Investment Services, Inc.
In order to avoid any conflict with portfolio trades for the Fund, the Adviser
and the Fund have adopted extensive restrictions on personal securities trading
by personnel of the Adviser and its affiliates. Some of these restrictions are:
preclearance for all personal trades and a ban on the purchase of initial public
offerings, as well as contributions to specified charities of profits on
securities held for less then 91 days. These restrictions are a continuation of
the basic principle that the interests of the Fund and its shareholders come
first.
ALTERNATIVE PURCHASE ARRANGEMENTS
AN ALTERNATIVE PURCHASE PLAN ALLOWS YOU TO CHOOSE THE METHOD OF PURCHASE THAT IS
BEST FOR YOU.
You can purchase shares of the Fund at a price equal to their net asset value
per share, plus a sales charge. At your election, this charge may be imposed
either at the time of the purchase (see "Initial Sales Charge Alternative--
Class A shares") or on a contingent deferred basis (see "Contingent Deferred
Sales Charge Alternative--Class B shares"). If you do not specify on your
account application the class of shares you are purchasing, it will be assumed
that you are investing in Class A shares.
INVESTMENTS IN CLASS A SHARES ARE SUBJECT TO AN INITIAL SALES CHARGE.
CLASS A SHARES. If you elect to purchase Class A shares, you will incur an
initial sales charge unless your purchase is $1 million or more. If you purchase
$1 million or more of Class A shares, you will not be subject to an initial
sales charge, but you will incur a sales charge if you redeem your shares within
one year of purchase. Class A shares are subject to ongoing distribution and
<PAGE> 10
service fees at a combined annual rate of up to 0.30% of the Fund's average
daily net assets attributable to the Class A shares. Certain purchases of Class
A shares qualify for reduced initial sales charges. See "Share Price --
Qualifying for a Reduced Sales Charge."
INVESTMENTS IN CLASS B SHARES ARE SUBJECT TO A CONTINGENT DEFERRED SALES CHARGE.
CLASS B SHARES. You will not incur a sales charge when you purchase Class B
shares, but the shares are subject to a sales charge if you redeem them within
six years of purchase (the"contingent deferred sales charge" or the "CDSC").
Class B shares are subject to ongoing distribution and service fees at a
combined annual rate of up to 1.00% of the Fund's average daily net assets
attributable to the Class B shares. Investing in Class B shares permits all of
your dollars to work from the time you make your investment, but the higher
ongoing distribution fee will cause these shares to have higher expenses than
that of Class A shares. To the extent that any dividends are paid by the Fund,
these higher expenses will result in lower dividends than those paid on Class A
shares.
Class B shares are not available to full-service defined contribution plans
administered by Investor Services or John Hancock Mutual Life Insurance Company
that had more than 100 eligible employees at the inception of the Fund
account.
FACTORS TO CONSIDER IN CHOOSING AN ALTERNATIVE
YOU SHOULD CONSIDER WHICH CLASS OF SHARES WOULD BE MORE BENEFICIAL FOR YOU.
The alternative purchase arrangement allows you to choose the most beneficial
way to buy shares, given the amount of your purchase, the length of time you
expect to hold your shares and other circumstances. You should consider whether,
during the anticipated life of your Fund investment, the CDSC and accumulated
fees on Class B shares would be less than the initial sales charge and
accumulated fees on Class A shares purchased at the same time; and to what
extent this differential would be offset by the Class A shares' lower expenses.
To help you make this determination, the table under the caption "Expense
Information" on page 2 of this Prospectus gives examples of the charges
applicable to each class of shares. Class A shares will normally be more
beneficial if you qualify for a reduced sales charge. See "Share Price--
Qualifying for a Reduced Sales Charge."
Class A shares are subject to lower distribution and service fees and,
accordingly, pay correspondingly higher dividends per share, to the extent that
any dividends are paid. However, because initial sales charges are deducted at
the time of purchase, you would not have all of your funds invested initially
and, therefore, would initially own fewer shares. If you do not qualify for
reduced initial sales charges and expect to maintain your investment for an
extended period of time, you might consider purchasing Class A shares. This is
because the accumulated distribution and service charges on Class B shares may
exceed the initial sales charge and accumulated distribution and service charges
on Class A shares during the life of your investment.
Alternatively, you might determine that it is more advantageous to purchase
Class B shares to have all your funds invested initially. However, you will be
subject to higher distribution fees and, for a six-year period, a CDSC.
In the case of Class A shares, distribution expenses that John Hancock Funds
incurs in connection with the sale of shares will be paid from the proceeds of
the initial sales charge and the ongoing distribution and service fees. In the
case of Class B shares, expenses will be paid from the proceeds of the ongoing
distribution and service fees, as well as from the CDSC incurred upon redemption
within six years of purchase. The purpose and function of the Class B shares'
CDSC and ongoing distribution and service fees are the same as those of the
Class A shares' initial sales charge and ongoing distribution and service fees.
Sales personnel distributing the Fund's shares may receive different
compensation for selling each class of shares.
Dividends, if any, on Class A and Class B shares will be calculated in the same
manner, at the same time and on the same day. They will also be in the same
amount, except for differences resulting from each class bearing only its own
distribution and service fees, shareholder meeting expenses and any incremental
<PAGE> 11
transfer agency costs. See "Dividends and Taxes."
THE FUND'S EXPENSES
For managing its investment and business affairs, the Fund pays a fee to the
Adviser which for the 1994 fiscal year, was 0.55% of the Fund's average daily
net asset value.
THE FUND PAYS DISTRIBUTION AND SERVICE FEES FOR MARKETING AND SALES- RELATED
SHAREHOLDER SERVICING.
The Class A and Class B shareholders have adopted distribution plans (each a
"Plan") pursuant to Rule 12b-1 under the Investment Company Act of 1940. Under
these Plans, the Fund will pay distribution and service fees at an aggregate
annual rate of 0.30% of the Class A shares' average daily net assets and an
aggregate annual rate of 1.00% of the Class B shares' average daily net assets.
In each case, up to 0.25% is for service expenses and the remaining amount is
for distribution expenses. Distribution fees are used to reimburse John Hancock
Funds for its distribution expenses including but not limited to: (i) initial
and ongoing sales compensation to Selling Brokers and others (including
affiliates of John Hancock Funds) engaged in the sale of Fund shares; (ii)
marketing, promotional and overhead expenses incurred in connection with the
distribution of Fund shares; and (iii) with respect to Class B shares only,
interest expenses on unreimbursed distribution expenses. In the event John
Hancock Funds is not fully reimbursed for payments made or expenses incurred by
it under the Class A Plan, these expenses will not be carried beyond one year
from the date they were incurred. These unreimbursed expenses under the Class B
Plan will be carried forward together with interest on the balance of these
unreimbursed expenses. For the fiscal year ended December 31, 1994 an aggregate
of $175,709 of distribution expenses or 8.5% of the average net assets of the
Class B shares of the Fund, was not reimbursed or recovered by the John Hancock
Funds through the receipt of deferred sales charges or 12b-1 fees in prior
periods.
Information on the Fund's total expenses is in the Fund's Financial Highlights
section of this Prospectus.
DIVIDENDS AND TAXES
Dividends from the Fund's net investment income are generally declared daily and
distributed monthly. Capital gains, if any, are generally distributed annually.
Dividends are reinvested in additional shares of your class unless you elect the
option to receive them in cash. If you elect the cash option and the U.S. Postal
Service cannot deliver your checks, your election will be converted to the
reinvestment option. Because of the higher expenses associated with Class B
shares, any dividend on Class B shares will be lower than that on Class A
shares. See "Share Price."
IN 1992, 1993 AND 1994, 99.8%, 99.8% AND 99.7%, RESPECTIVELY, OF THE FUND'S
INCOME DIVIDENDS WERE EXEMPT FROM FEDERAL INCOME TAX.
TAXATION. The Fund intends to satisfy applicable tax requirements so that
interest earned by the Fund from Tax-Exempt Bonds will be federally tax-free
when paid to you as income distributions. Dividends derived from interest on
certain Tax-Exempt Bonds that are "private activity bonds" may, however,
increase the Federal alternative minimum tax liability of shareholders that are
subject to the individual alternative minimum tax, and all tax-exempt dividends
may increase a corporate shareholder's liability, if any, for the federal
alternative minimum tax.
Shareholders receiving social security benefits and certain railroad retirement
benefits may be subject to federal income tax on a portion of such benefits as a
result of receiving investment income, including tax-exempt income (such as
exempt-interest) and other dividends paid by the Fund. The Fund may not be an
appropriate investment for persons who are "substantial users" of facilities
financed by industrial development or private activity bonds or persons related
<PAGE> 12
to substantial users. Consult your tax adviser if you think this may apply to
you.
Certain of the Fund's permitted investments may produce taxable income or
capital gains. Dividends from any net short-term capital gains or any taxable
income the Fund earns, including accrued market discount included in the Fund's
income, are taxable to you as ordinary income and dividends from the Fund's net
long-term capital gains are taxable as long-term capital gains. These dividends
are taxable, whether received in cash or reinvested in additional shares.
Certain dividends paid by the Fund in January of a given year may be taxable as
if you received them the previous December. The Fund will send you a statement
by January 31 showing the tax status of the dividends you received for the prior
year.
The Fund has qualified and intends to continue to qualify as a regulated
investment company under Subchapter M of the Internal Revenue Code of 1986, as
amended (the "Code"). As a regulated investment company, the Fund will not be
subject to Federal income tax on any net investment income and net realized
capital gains that are distributed to its shareholders at least annually. When
you redeem (sell) or exchange shares, you may realize a taxable gain or loss.
On the account application, you must certify that your social security or other
taxpayer identification number is correct and that you are not subject to backup
withholding of Federal income tax. If you do not provide this information or are
otherwise subject to backup withholding, the Fund may be required to withhold
31% of your taxable dividends and the proceeds of redemptions and exchanges.
In addition to Federal taxes with respect to any taxable dividends, you may be
subject to state, local or foreign taxes, depending on your residence. In some
states, a portion of the Fund's dividends which represents interest received by
the Fund on direct U.S. government obligations is exempt from tax. Some states
and localities exempt Fund distributions of interest on their own municipal
obligations. You will receive tax information each year showing the percentage
of the Fund's dividends attributable to obligations of each state. Non-U.S.
shareholders and tax-exempt shareholders are subject to different tax treatment
not described above. You should consult your tax adviser for specific advice.
PERFORMANCE
THE FUND MAY ADVERTISE ITS YIELD AND TOTAL RETURN.
Yield reflects the Fund's rate of income on portfolio investments as a
percentage of its share price. Yield is computed by annualizing the result of
dividing the net investment income per share over a 30 day period by the maximum
offering price per share on the last day of that period. Yield is calculated
according to accounting methods that are standardized for all stock and bond
funds. Because yield accounting methods differ from the methods used for other
accounting purposes, the Fund's yield may not equal the income paid on your
shares or the income reported in the Fund's financial statements. The Fund may
also quote a tax-equivalent yield, which shows the taxable yield you would have
to earn before taxes to equal the Fund's tax-free yield. A tax-equivalent yield
is calculated by dividing the Fund's tax-free yield by one minus a stated tax
rate.
The Fund's total return shows the overall change in value of a hypothetical
investment in the Fund, assuming the reinvestment of all dividends. Cumulative
total return shows the Fund's performance over a period of time. Average annual
total return shows the cumulative return of the Fund shares divided over the
number of years included in the period. Because average annual total return
tends to smooth out variations in the Fund's performance, you should recognize
that it is not the same as actual year-to-year results.
Both total return and yield calculations for Class A shares generally include
the effect of paying the maximum sales charge (except as shown in "The Fund's
Financial Highlights"). Investments at lower sales charges would result in
higher performance figures. Yield and total return for the Class B shares
reflect the deduction of the applicable CDSC imposed on a redemption of shares
held for the applicable period. All calculations assume that all dividends are
reinvested at net asset value on the reinvestment dates during the periods.
Yield and total return of Class A and Class B shares will be calculated
separately, and, because each class is subject to different expenses, the yield
or total return may differ with respect to that class for the same period. The
<PAGE> 13
relative performance of the Class A and Class B shares will be affected by a
variety of factors, including the higher operating expenses attributable to the
Class B shares, whether the Fund's investment performance is better in the
earlier or later portions of the period measured and the level of net assets of
the classes during the period. The Fund will include the total return of both
classes in any advertisement or promotional materials including the Fund's
performance data. The value of Fund shares, when redeemed, may be more or less
than their original cost. Both yield and total return are historical
calculations, and are not indications of future performance. See "Factors to
Consider in Choosing an Alternative."
HOW TO BUY SHARES
- ------------------------------------------------------------------------------
OPENING AN ACCOUNT
The minimum initial investment in Class A and Class B shares is $1,000 ($250
for group Complete the Account Application attached to this Prospectus.
Indicate whether you are purchasing Class A or Class B shares. If you do not
specify which class of shares you are purchasing, Investors Services will
assume you are investing in Class A shares.
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY CHECK 1. Make your check payable to John Hancock Investor
Services Corporation ("Investor Services").
2. Deliver the completed application and check to
your registered representative or Selling Broker,
or mail it directly to Investor Services.
</TABLE>
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY WIRE 1. Obtain an account number by contacting your
registered representative or Selling Broker, or
by calling 1-800-225-5291.
2. Instruct your bank to wire funds to:
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For credit to: John Hancock Tax-Exempt Income
Fund
(Class A or Class B shares)
Your account number
Name(s) under which account is registered
3. Deliver the completed application to your
registered representative or Selling Broker, or
mail it directly to Investor Services.
</TABLE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<TABLE>
BUYING ADDITIONAL SHARES
<S> <C>
MONTHLY AUTOMATIC 1. Complete the "Automatic Investing" and "Bank
ACCUMULATION Accumulation sections on the Account Privileges
PROGRAM (MAAP) Application, designating a bank account from
which funds may be drawn.
2. The amount you elect to invest will be
automatically withdrawn from your bank or credit
union account.
</TABLE>
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY TELEPHONE 1. Complete the "Invest-By-Phone" and "Bank
Information" sections on the Account Privileges
Application, designating a bank account from
which your funds may be drawn. Note that in order
to invest by phone, your account must be in a
bank or credit union that is a member of the
Automated Clearing House system (ACH).
2. After your authorization form has been processed,
you may purchase Class A or Class B shares by
calling Investor Services toll-free at
1-800-225-5291.
</TABLE>
<PAGE> 14
<TABLE>
<S> <C>
3. Give the Investor Services representative the
name(s) in which your account is registered, the
Fund name, the class of shares you own, your
account number and the amount you wish to invest.
4. Your investment normally will be credited to your
account the business day following your phone
request.
</TABLE>
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY CHECK 1. Either complete the detachable stub included on
your account statement or include a note with
your investment listing the name of the Fund, the
class of shares you own, your account number and
the name(s) in which the account is registered.
2. Make your check payable to John Hancock Investor
Services Corporation.
3. Mail the account information and check to:
John Hancock Investor Services Corporation
P.O. Box 9115
Boston,MA 02205-9115
or deliver it to your registered representative
or Selling Broker.
</TABLE>
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY WIRE Instruct your bank to wire funds to:
First Signature Bank & Trust
John Hancock Deposit Account No. 900000260
ABA Routing No. 211475000
For Credit To: John Hancock Tax-Exempt Income
Fund
(Class A or Class B shares)
Your account number
Name(s) under which account is registered
</TABLE>
- ------------------------------------------------------------------------------
Other Requirements: All purchases must be made in U.S. dollars. Checks written
on foreign banks will delay purchases until U.S. funds are received, and a
collection charge may be imposed. Shares of the Fund are priced at the
offering price based on the net asset value computed after John Hancock Funds
receives notification of the dollar equivalent from the Fund's custodian bank.
Wire purchases normally take two or more hours to complete and, to be accepted
the same day, must be received by 4:00 p.m. New York time. Your bank may
charge a fee to wire funds. Telephone transactions are recorded to verify
information. Certificates are not issued unless a request is made in writing
to Investor Services.
- ------------------------------------------------------------------------------
YOU WILL RECEIVE ACCOUNT STATEMENTS, WHICH YOU SHOULD KEEP TO HELP WITH YOUR
PERSONAL RECORDKEEPING.
You will receive a statement of your account after any transaction that affects
your share balance or registration (statements related to reinvestment of
dividends and automatic investment/withdrawal plans will be sent to you
quarterly). A tax information statement will be mailed to you by January 31 of
each year.
SHARE PRICE
THE OFFERING PRICE OF YOUR SHARES IS THEIR NET ASSET VALUE PLUS A SALES CHARGE,
IF APPLICABLE, WHICH WILL VARY WITH THE PURCHASE ALTERNATIVE YOU CHOOSE.
The net asset value per share ("NAV") is the value of one share. The NAV of each
class can differ. Securities in the Fund's portfolio are valued on the basis of
market quotations, valuations provided by independent pricing services, or at
fair value as determined in good faith according to procedures approved by the
Trustees. Short-term debt investments maturing within 60 days are valued at
amortized cost which approximates market value. The NAV is calculated once daily
as of the close of regular trading on the New York Stock Exchange (generally at
<PAGE> 15
4:00 p.m., New York time) on each day that the Exchange is open.
Shares of the Fund are sold at the offering price based on the NAV computed
after your investment request is received in good order by John Hancock Funds.
If you buy shares of the Fund through a Selling Broker, the Selling Broker must
receive your investment before the close of regular trading on the New York
Stock Exchange, and transmit it to John Hancock Funds before its close of
business, to receive that day's offering price.
INITIAL SALES CHARGE ALTERNATIVE -- CLASS A SHARES. The offering price you pay
for Class A shares of the Fund equals the NAV plus a sales charge, as follows:
<TABLE>
COMBINED
REALLOWANCE REALLOWANCE
SALES CHARGE SALES CHARGE AND SERVICE TO SELLING
AS A AS A FEE AS A BROKER AS
AMOUNT INVESTED PERCENTAGE PERCENTAGE PERCENTAGE A PERCENTAGE
(INCLUDING SALES OF THE OF THE OF OFFERING OF OFFERING
CHARGE) OFFERING PRICE AMOUNT INVESTED PRICE<F4> PRICE<F1>
- --------------- -------------- --------------- ----------- ------------
<S> <C> <C> <C> <C>
Less than $100,000 4.50% 4.71% 4.00% 3.76%
$100,000 to
$249,999 3.75% 3.90% 3.25% 3.01%
$250,000 to
$499,999 3.00% 3.09% 2.50% 2.26%
$500,000 to
$999,999 2.00% 2.04% 1.75% 1.51%
$1,000,000 and over 0.00%<F2> 0.00%<F2> <F3> 0.00%<F3>
<FN>
<F1> Upon notice to Selling Brokers with whom it has sales agreements, John
Hancock Funds may reallow an amount up to the full applicable sales charge.
In addition to the reallowance allowed to all Selling Brokers, John Hancock
Funds will pay the following: round trip airfare to a resort will be
offered to each registered representative of a Selling Broker (if the
Selling Broker has agreed to participate) who sells certain amounts of
shares of John Hancock funds. John Hancock Funds will make these incentive
payments out of its own resources. Other than distribution fees, the Fund
does not bear distribution expenses. A Selling Broker to whom substantially
the entire sales charge is reallowed or who receives these incentives may
be deemed to be an underwriter under the Securities Act of 1933.
<F2> No sales charge is payable at the time of purchase of Class A shares of $1
million or more, but a contingent deferred sales charge may be imposed in
the event of certain redemption transactions within one year of purchase.
<F3> John Hancock Funds may pay a commission and first year's service fee (as
described in (+) below) to Selling Brokers who initiate and are
responsible for purchases of $1 million or more of shares in aggregate, as
follows: 1% on sales to $4,999,999, plus 0.50% on the next $5 million and
0.25% on $10 million and over.
<F4> At the time of sale, John Hancock Funds pays to Selling Brokers the first
year's service fee in advance, in an amount equal to 0.25% of the net
assets invested in the Fund. Thereafter it pays the service fee
periodically in arrears in an amount up to 0.25% of the Fund's average
annual net assets. Selling Brokers receive the fee as compensation for
providing personal and account maintenance services to shareholders.
</TABLE>
Sales charges ARE NOT APPLIED to any dividends that are reinvested in additional
shares of the Fund.
John Hancock Funds will pay certain affiliated Selling Brokers at an annual rate
of up to 0.05% of the daily net assets of the accounts attributable to these
brokers.
Under certain circumstances described below, investors in Class A shares may
be entitled to pay reduced sales charges. See "Qualifying For a Reduced Sales
Charge" below.
CONTINGENT DEFERRED SALES CHARGE -- INVESTMENTS OF $1 MILLION OR MORE IN CLASS A
SHARES. Purchases of $1 million or more of Class A shares will be made at net
<PAGE> 16
asset value with no initial sales charge, but if the shares are redeemed within
12 months after the end of the calendar month in which the purchase was made
(the contingent deferred sales charge period), a contingent deferred sales
charge ("CDSC") will be imposed. The rate of the CDSC will depend on the amount
invested as follows:
<TABLE>
AMOUNT INVESTED CDSC RATE
---------------- ---------
<S> <C>
$1 million to $4,999,999 1.00%
Next $5 million to $9,999,999 0.50%
Amounts of $10 million and over 0.25%
</TABLE>
The charge will be assessed on an amount equal to the lesser of the current
market value or the original purchase cost of the redeemed Class A shares
redeemed. Accordingly, no CDSC will be imposed on increases in account value
above the initial purchase price, including any dividends which have been
reinvested in additional Class A shares.
In determining whether a CDSC is applicable to a redemption, the calculation
will be determined in a manner that results in the lowest possible rate being
charged. Therefore, it will be assumed that the redemption is first made from
any shares in your account that are not subject to the CDSC. The CDSC is waived
on redemption in certain circumstances. See the discussion under "Waiver of
Contingent Deferred Sales Charges".
YOU MAY QUALIFY FOR A REDUCED SALES CHARGE ON YOUR INVESTMENTS IN CLASS A
SHARES.
QUALIFYING FOR A REDUCED SALES CHARGE. If you invest more than $100,000 in Class
A shares of the Fund or a combination of funds in the John Hancock funds (except
money market funds), you may qualify for a reduced sales charge on your
investments in Class A shares through a LETTER OF INTENTION. You may also be
able to use the ACCUMULATION PRIVILEGE and COMBINATION PRIVILEGE to take
advantage of the value of your previous investments in Class A shares of the
John Hancock funds when meeting the breakpoints for a reduced sales charge. For
the ACCUMULATION PRIVILEGE and COMBINATION PRIVILEGE, the applicable sales
charge will be based on the total of:
1. Your current purchase of Class A shares of the Fund;
2. The net asset value (at the close of business on the previous day) of (a) all
Class A shares of the Fund you hold, and (b) all Class A shares of any John
Hancock funds you hold; and
3. The net asset value of all shares held by another shareholder eligible to
combine his or her holdings with you into a single "purchase."
EXAMPLE:
If you hold Class A shares of a John Hancock fund with a net asset value of
$80,000, and subsequently invest $20,000 in Class A shares of the Fund, the
sales charge on this subsequent investment would be 3.75% and not 4.50%. This
rate is the rate that would otherwise be applicable to investments of less than
$100,000. See "Initial Sales Charge Alternative--Class A Shares."
If you are in one of the following categories, you may purchase Class A shares
of the Fund without paying a sales charge:
FUND EMPLOYEES AND AFFILIATES
* A Trustee or officer of the Fund; a Director or officer of the Adviser and its
affiliates or Selling Brokers; employees or sales representatives of any of
the foregoing; retired officers, employees or Directors of any of the
foregoing; a member of the immediate family of any of the foregoing; or any
fund, pension, profit sharing or other benefit plan for the individuals
described above.
<PAGE> 17
SPECIAL TRANSACTIONS
* Any state, county, city or any instrumentality, department, authority or
agency of these entities that is prohibited by applicable investment laws from
paying a sales charge or commission when it purchases shares of any registered
investment management company.*
* A bank, trust company, credit union, savings institution or other type of
depository institution, its trust departments or common trust funds (an
"eligible depository institution") if it is purchasing $1 million or more for
non-discretionary customers or accounts.*
* A broker, dealer or registered investment adviser that has entered into an
agreement with John Hancock Funds providing specifically for the use of Fund
shares in fee-based investment products made available to their clients.
* A former participant in an employee benefit plan with John Hancock funds, when
he/she withdraws from his/her plan and transfers any or all of his/her plan
distributions directly to the Fund.
- ---------
* For investments made under these provisions, John Hancock Funds may make a
payment out of its own resources to the Selling Broker in an amount not to
exceed 0.25% of the amount invested.
Class A shares of the Fund may also be purchased without an initial sales charge
in connection with certain liquidation, merger or acquisition transactions
involving other investment companies or personal holding companies.
CONTINGENT DEFERRED SALES CHARGE ALTERNATIVE -- CLASS B SHARES. Class B shares
are offered at net asset value per share without a sales charge, so that your
entire initial investment will go to work at the time of purchase. However,
Class B shares redeemed within six years of purchase will be subject to a CDSC
at the rates set forth below. This charge will be assessed on an amount equal to
the lesser of the current market value or the original purchase cost of the
shares being redeemed. Accordingly, you will not be assessed a CDSC on increases
in account value above the initial purchase price, including shares derived from
dividend reinvestments.
In determining whether a CDSC applies to a redemption, the calculation will be
determined in a manner that results in the lowest possible rate being charged.
It will be assumed that your redemption comes first from shares you have held
beyond the six-year CDSC redemption period or those you acquired through
dividend reinvestment, and next from the shares you have held the longest during
the six-year period. The CDSC is waived on redemptions in certain circumstances.
See the discussion "Waiver of Contingent Deferred Sales Charges" below.
EXAMPLE:
You have purchased 100 shares at $10 per share. The second year after your
purchase, your investment's net asset value per share has increased by $2 to
$12, and you have gained 10 additional shares through dividend reinvestment. If
you redeem 50 shares at this time, your CDSC will be calculated as follows:
* Proceeds of 50 shares redeemed at $12 per share $ 600
* Minus proceeds of 10 shares not subject to CDSC because they were
acquired through dividend reinvestment (10 x $12) -120
* Minus appreciation on remaining shares, also not subject to CDSC
(40 x $2) - 80
* Amount subject to CDSC $ 400
Proceeds from the CDSC are paid to John Hancock Funds. John Hancock Funds uses
all or part of them to defray its expenses related to providing the Fund with
distribution services connected to the sale of the Class B shares, such as
compensating selected Selling Brokers for selling these shares. The combination
of the CDSC and the distribution and service fees makes it possible for the Fund
to sell Class B shares without deducting a sales charge at the time of the
purchase.
The amount of the CDSC, if any, will vary depending on the number of years from
<PAGE> 18
the time you purchase your Class B shares until the time you redeem them. Solely
for purposes of determining the holding period, any payments you make during the
month will be aggregated and deemed to have been made on the last day of the
month.
<TABLE>
<CAPTION>
YEAR IN WHICH CLASS B CONTINGENT DEFERRED SALES
SHARES REDEEMED CHARGE AS A PERCENTAGE OF
FOLLOWING PURCHASE DOLLAR AMOUNT SUBJECT TO CDSC
- ------------------ -----------------------------
<S> <C>
First 5.0%
Second 4.0%
Third 3.0%
Fourth 3.0%
Fifth 2.0%
Sixth 1.0%
Seventh and thereafter None
</TABLE>
A commission equal to 3.75% of the amount invested and a first year's service
fee equal to 0.25% of the amount invested, are paid to Selling Brokers. The
initial service fee is paid in advance at the time of sale for personal and
account maintenance services provided to shareholders during the twelve months
following the sale. Thereafter the service fee is paid in arrears.
UNDER CERTAIN CIRCUMSTANCES, THE CDSC ON CLASS B AND CERTAIN CLASS A SHARE
REDEMPTIONS WILL BE WAIVED.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES. The CDSC will be waived on
redemptions of Class B shares and of Class A shares that are subject to a CDSC,
unless indicated otherwise, in the circumstances defined below:
* Redemptions of Class B shares made under a Systematic Withdrawal Plan (see
"How to Redeem Shares"), as long as your annual redemptions do not exceed 10%
of your account value at the time you established your Systematic Withdrawal
Plan and 10% of your value of subsequent investments (less redemptions) in
that account at the time you notify Investor Services. This waiver does not
apply to Systematic Withdrawal Plan redemptions of Class A shares that are
subject to a CDSC.
* Redemptions due to death or disability.
* Redemptions made under the Reinvestment Privilege, as described in "Additional
Services and Programs" of the Prospectus.
* Redemptions made pursuant to the Fund's right to liquidate your account if you
own fewer than 50 shares.
* Redemptions made in connection with certain liquidation, merger or acquisition
transactions involving other investment companies or personal holding
companies.
* Redemptions from certain IRA and retirement plans that purchased shares prior
to October 1, 1992.
If you qualify for a CDSC waiver under one of these situations, you must notify
Investor Services either directly or through your Selling Broker at the time you
make your redemption. The waiver will be granted once Investor Services has
confirmed that you are entitled to the waiver.
CONVERSION OF CLASS B SHARES. Your Class B shares, and an appropriate portion of
reinvested dividends on those shares, will be converted into Class A shares
automatically. This will occur at the end of the month eight years after the
shares were purchased, and will result in lower annual distribution fees. If you
exchanged Class B shares into this Fund from another John Hancock fund, the
calculation will be based on the time you purchased the shares in the original
fund. The Fund has been advised that the conversion of Class B shares to Class A
shares should not be taxable for Federal income tax purposes, nor should it
change your tax basis or tax holding period for the converted shares.
HOW TO REDEEM SHARES
You may redeem all or a portion of your shares on any business day. Your shares
will be redeemed at the next NAV calculated after your redemption request is
received in good order by Investor Services, less any applicable CDSC. The Fund
<PAGE> 19
may hold payment until it is reasonably satisfied that investments recently made
by check or Invest-by-Phone have been collected (which may take up to 10
calendar days).
Once your shares are redeemed, the Fund generally sends you payment on the next
business day. When you redeem your shares, you may realize a taxable gain or
loss depending usually on the difference between what you paid for them and what
you receive for them, subject to certain tax rules. Under unusual circumstances,
the Fund may suspend redemptions or postpone payment for up to seven days or
longer, as permitted by Federal securities laws.
<TABLE>
- ------------------------------------------------------------------------------
TO ASSURE ACCEPTANCE OF YOUR REDEMPTION REQUEST, PLEASE FOLLOW THESE PROCEDURES.
<S> <C>
BY TELEPHONE All Fund shareholders are automatically eligible for
privilege. Call 1-800-225-5291, from 8:00 A.M. to 4:00
P.M.(New York time), Monday through Friday, excluding
days on which the New York Stock Exchange is closed.
Investor Services employs the following procedures to
confirm that instructions received by telephone are
genuine. Your name, the account number, taxpayer
identification number applicable to the account and other
relevant information may be requested. In addition,
telephone instructions are recorded.
You may redeem up to $100,000 by telephone, but the
address on the account must not have changed for the last
30 days. A check will be mailed to the exact name(s) and
address shown on the account.
If reasonable procedures, such as those described above,
are not followed, the Fund may be liable for any loss due
to unauthorized or fraudulent telephone instructions. In
all other cases, neither the Fund nor Investor Services
will be liable for any loss or expense for acting upon
telephone instructions made in accordance with the
telephone transaction procedures mentioned above.
Telephone redemption is not available for shares of the
Fund that are in certificate form.
During periods of extreme economic conditions or market
changes, telephone requests may be difficult to implement
due to a large volume of calls. During these times you
should consider placing redemption requests in writing or
using EASI-Line. EASI-Line's telephone number is
1-800-338-8080.
</TABLE>
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
BY WIRE If you have a telephone redemption form on file with the
Fund, redemption proceeds of $1,000 or more can be wired
on the next business day to your designated bank account,
and a fee (currently $4.00) will be deducted. You may
also use electronic funds transfer to your assigned bank
account, and the funds are usually collectable after two
business days. Your bank may or may not charge for this
service. Redemptions of less than $1,000 will be sent by
check or electronic funds transfer.
This feature may be elected by completing the "Telephone
Redemption" section on the Account Privileges Application
that is included with this
Prospectus.
</TABLE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
<TABLE>
<S> <C>
IN WRITING Send a stock power or letter of instruction specifying
the name of the Fund, the dollar amount or the number of
shares to be redeemed, your name, class of shares, your
account number, and the additional requirements listed
below that apply to your particular account.
</TABLE>
<PAGE> 20
- ------------------------------------------------------------------------------
<TABLE>
TYPE OF REGISTRATION REQUIREMENTS
-------------------- ------------
<S> <C>
Individual, Joint Tenants, Sole A letter of instruction signed
Proprietorship, Custodial (with titles, where applicable)
(Uniform Gifts or Transfer to by all persons authorized to sign
Minors Act), General Partners. for the account, exactly as it is
registered, with the signature(s)
guaranteed.
Corporation, Association A letter of instruction and a
corporate resolution, signed by
person(s) authorized to act on
the account, with the
signature(s) guaranteed.
Trusts A letter of instruction signed by
the Trustee(s), with the
signature(s) guaranteed. (If the
Trustee's name is not registered
on your account, also provide a
copy of the trust document,
certified within the last 60
days.)
If you do not fall into any of these registration categories, please call
1-800-225-5291 for further instructions.
</TABLE>
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
WHO MAY GUARANTEE YOUR SIGNATURE
A signature guarantee is a widely accepted way to protect you and the Fund by
verifying the on your request. It may not be provided by a notary public. If
the net asset value of the shares redeemed is $100,000 or less, John Hancock
Funds may guarantee the signature. The following institutions may provide you
with a signature guarantee, provided that the institution meets credit
standards established by Investor Services: (i) a bank; (ii) a securities
broker or dealer, including a government or municipal securities broker or
dealer, that is a member of a clearing corporation or meets certain net
capital requirements; (iii) a credit union having authority to issue signature
guarantees; (iv) a savings and loan association, a building and loan
association, a cooperative bank, a federal savings bank or association; or (v)
a national securities exchange, a registered securities exchange or a clearing
agency.
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
THROUGH YOUR BROKER Your broker may be able to initiate the redemption.
Contact your broker for instructions.
- ------------------------------------------------------------------------------
If you have certificates for your shares, you must submit them with your stock
power or a letter of instruction. Unless you specify to the contrary, any
outstanding Class A shares will be redeemed before Class B shares. You may not
redeem certificated shares by telephone.
- ------------------------------------------------------------------------------
ADDITIONAL INFORMATION ABOUT REDEMPTIONS
Due to the proportionately high cost of maintaining smaller accounts, the Fund
reserves the redeem at net asset value all shares in an account which holds
fewer than 50 shares (except accounts under retirement plans) and to mail the
proceeds to the shareholder, or the transfer agent may impose an annual fee of
$10.00. No account will be involuntarily redeemed or additional fee imposed,
if the value of the account is in excess of the Fund's minimum initial
investment. No CDSC will be imposed on involuntary redemptions of shares.
<PAGE> 21
Shareholders will be notified before these redemptions are to be made or this
fee is imposed, and will have 30 days to purchase additional shares to bring
their account balance up to the required minimum. Unless the number of shares
acquired by further purchases and dividend reinvestments, if any, exceeds the
number of shares redeemed, repeated redemptions from a small account may
eventually trigger this policy.
- ------------------------------------------------------------------------------
ADDITIONAL SERVICES AND PROGRAMS
EXCHANGE PRIVILEGE
YOU MAY EXCHANGE SHARES OF THE FUND FOR SHARES OF THE SAME CLASS OF ANOTHER JOHN
HANCOCK FUND.
If your investment objective changes, or if you wish to achieve further
diversification, John Hancock offers other funds with a wide range of investment
goals. Contact your registered representative or Selling Broker and request a
prospectus for the John Hancock funds that interest you. Read the prospectus
carefully before exchanging your shares. You can exchange shares of each class
of the Fund only for shares of the same class of another John Hancock fund. For
this purpose, John Hancock funds with only one class of shares will be treated
as Class A, whether or not they have been so designated.
Exchanges between funds that are not subject to a CDSC are based on their
respective net asset values. No sales charge or transaction charge is imposed.
Class B shares of the Fund that are subject to a CDSC may be exchanged for Class
B shares of another John Hancock fund without incurring the CDSC; however these
shares will be subject to the CDSC schedule of the shares acquired (except that
exchanges into John Hancock Short-Term Strategic Income Fund, John Hancock
Adjustable U.S. Government Trust and John Hancock Limited-Term Government Fund
will be subject to the initial fund's CDSC). For purposes of computing the CDSC
payable upon redemption of shares acquired in an exchange, the holding period of
the original shares is added to the holding period of the shares acquired in an
exchange. However, if you exchange Class B shares purchased prior to January 1,
1994 for Class B shares of any other John Hancock fund, you will continue to be
subject to the CDSC schedule that was in effect at your initial purchase date.
You may exchange Class B shares of any John Hancock fund into shares of a John
Hancock money market fund at net asset value. However, you will continue to be
subject to a CDSC upon redemption. The rate of the CDSC will be the rate in
effect on the original fund at the time of the exchange.
The Fund reserves the right to require that you keep previously exchanged shares
(and reinvested dividends) in the Fund for 90 days before you are permitted to
execute a new exchange. The Fund may also alter the terms of or terminate the
exchange privilege upon 60 days' notice to shareholders.
An exchange of shares is treated as a redemption of shares of one fund and the
purchase of shares in another for Federal income tax purposes, and may result in
a taxable gain or loss.
When you make an exchange, your account registration in both the existing and
new account must be identical. The exchange privilege is available only in
states where the exchange can be made legally.
Under exchange agreements with John Hancock Funds, certain dealers, brokers and
investment advisers may exchange their clients' Fund shares, subject to the
terms of those agreements and John Hancock Funds' right to reject or suspend
those exchanges at any time. Because of the restrictions and procedures under
those agreements, the exchanges may be subject to timing limitations and other
restrictions that do not apply to exchanges requested by shareholders directly,
as described above.
Because Fund performance and shareholders can be hurt by excessive trading, the
Fund reserves the right to terminate the exchange privilege for any person or
group that, in John Hancock Funds' judgment, is involved in a pattern of
exchanges that coincide with a "market timing" strategy that may disrupt the
Fund's ability to invest effectively according to its investment objective and
policies, or might otherwise affect the Fund and its shareholders adversely. The
Fund may also temporarily or permanently terminate the exchange privilege for
any person who makes seven or more exchanges out of the Fund per calendar year.
<PAGE> 22
Accounts under common control or ownership will be aggregated for this purpose.
Although the Fund will attempt to give you prior notice whenever it is
reasonably able to do so, it may impose these restrictions at any time.
BY TELEPHONE
1. When you fill out the application for your purchase of Fund shares, you
automatically authorize exchanges by telephone unless you check the box
indicating that you do not wish to have the telephone exchange privilege.
2. Call 1-800-225-5291. Have the account number of your current fund and the
exact name in which it is registered available to give to the telephone
representative.
3. Your name, the account number, taxpayer identification number applicable to
the account and other relevant information may be requested. In addition,
telephone instructions are recorded.
IN WRITING
1. In a letter, request an exchange and list the following:
-- the name and class of the fund whose shares you currently own
-- your account number
-- the name(s) in which the account is registered
-- the name of the fund in which you wish your exchange to be invested
-- the number of shares, all shares or the dollar amount you wish to exchange
Sign your request exactly as the account is registered.
2. Mail the request and information to:
John Hancock Investor Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
REINVESTMENT PRIVILEGE
IF YOU REDEEM SHARES OF THE FUND, YOU MAY BE ABLE TO REINVEST THE PROCEEDS IN
THE FUND OR ANOTHER JOHN HANCOCK FUND WITHOUT PAYING AN ADDITIONAL SALES CHARGE.
1. You will not be subject to a sales charge on Class A shares that you reinvest
in any John Hancock fund that is otherwise subject to a sales charge, as long
as you reinvest within 120 days from the redemption date. If you paid a CDSC
upon a redemption, you may reinvest at net asset value in the same class of
shares from which you redeemed within 120 days. Your account will be credited
with the amount of the CDSC previously charged, and the reinvested shares
will continue to be subject to a CDSC. For purposes of computing the CDSC
payable upon a subsequent redemption, the holding period of the shares
acquired through reinvestment will include the holding period of the redeemed
shares.
2. Any portion of your redemption may be reinvested in the Fund shares or in
shares of any of the other John Hancock funds, subject to the minimum
investment limit of that fund.
3. To reinvest in shares of the Fund, you must notify Investor Services in
writing. Include the Fund(s) name, account number and class from which your
shares were originally redeemed.
SYSTEMATIC WITHDRAWAL PLAN
YOU CAN PAY ROUTINE BILLS OR MAKE PERIODIC DISBURSEMENTS FROM YOUR ACCOUNT.
1. You can elect the Systematic Withdrawal Plan at any time by completing the
Account Privileges Application which is attached to this Prospectus. You can
<PAGE> 23
also obtain the Application from your registered representative or by calling
1-800-225-5291.
2. To be eligible, you must have at least $5,000 in your account.
3. Payments from your account can be made monthly, quarterly, semi-annually or
annually or on a selected monthly basis to yourself or any other designated
payee.
4. There is no limit on the number of payees you may authorize, but all payments
must be made at the same time or intervals.
5. It is not advantageous to maintain a systematic withdrawal plan concurrently
with purchases of additional Class A or Class B shares because you may be
subject to an initial sales charge on your purchases of Class A shares or to
a CDSC on your redemptions of Class B shares. In addition, your redemptions
are taxable events.
6. Redemptions will be discontinued if the U.S. Postal Service cannot deliver
your checks, or if deposits to a bank account are returned for any reason.
MONTHLY AUTOMATIC ACCUMULATION PROGRAM (MAAP)
YOU CAN MAKE AUTOMATIC INVESTMENTS AND SIMPLIFY YOUR INVESTING.
1. You can authorize an investment to be drawn automatically each month from
your bank for investment in Fund shares, under the "Automatic Investing" and
"Bank Information" sections of the Account Privileges Application.
2. You can also authorize automatic investing through payroll deduction by
completing the "Direct Deposit Investing" section of the Account Privileges
Application.
3. You can terminate your Monthly Automatic Accumulation Program at any time.
4. There is no charge to you for this program, and there is no cost to the Fund.
5. If you have payments being withdrawn from a bank account and we are notified
that the account has been closed, your withdrawals will be discontinued.
GROUP INVESTMENT PROGRAM
ORGANIZED GROUPS OF AT LEAST FOUR PERSONS MAY ESTABLISH ACCOUNTS.
1. An individual account will be established for each participant, but the
initial sales charge for Class A shares will be based on the aggregate dollar
amount of all participants' investments. To determine how to qualify for this
program, contact your registered representative or call 1-800-225- 5291.
2. The initial aggregate investment of all participants in the group must be at
least $250.
3. There is no additional charge for program. There is no obligation to make
investments beyond the minimum, and you may terminate the program at any
time.
<PAGE> 24
QUALITY DISTRIBUTION
The average weighted quality distribution of the securities in the portfolio for
the year ended December 31, 1994:
<TABLE>
<CAPTION>
RATING RATING
AVERAGE % OF ASSIGNED % OF ASSIGNED % OF
SECURITY RATINGS VALUE PORTFOLIO BY ADVISER PORTFOLIO BY SERVICE PORTFOLIO
- ---------------- ----- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
AAA $125,541,795 25.4% 0 0.0% $125,541,795 25.4%
AA 128,065,160 26.0% 0 0.0% 128,065,160 26.0%
A 133,053,100 27.0% 0 0.0% 133,053,100 27.0%
BBB 96,601,270 19.5% 9,526,518 1.9% 87,074,752 17.6%
BB 8,664,235 1.8% 0 0.0% 8,664,235 1.8%
B 0 0.0% 0 0.0% 0 0.0%
CCC 0 0.0% 0 0.0% 0 0.0%
CC 0 0.0% 0 0.0% 0 0.0%
C 0 0.0% 0 0.0% 0 0.0%
D 0 0.0% 0 0.0% 0 0.0%
------------ ----- --------- --- ------------ ----
Debt Securities 491,925,560 99.7% 9,526,518 1.9% $482,399,042 97.8%
Equity Securities 0 0.0%
Short-Term Securities 1,575,462 0.3%
------------ -----
Total Portfolio $493,501,022 100.0%
------------ -----
Other Assets -- Net $ 11,138,728
------------
Net Assets $504,639,750
============
</TABLE>
The ratings are described in the Statement of Additional Information.
<PAGE> 25
JOHN HANCOCK TAX-EXEMPT
INCOME FUND
INVESTMENT ADVISER
John Hancock Advisers, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
PRINCIPAL DISTRIBUTOR
John Hancock Funds, Inc.
101 Huntington Avenue
Boston, Massachusetts 02199-7603
CUSTODIAN
Investors Bank & Trust
Company
24 Federal Street
Boston, Massachusetts 02110
TRANSFER AGENT
John Hancock Investor
Services Corporation
P.O. Box 9116
Boston, Massachusetts 02205-9116
INDEPENDENT AUDITORS
Ernst & Young LLP
200 Clarendon Street
Boston, Massachusetts 02116
HOW TO OBTAIN INFORMATION
ABOUT THE FUND
For: Service Information
Telephone Exchange
Investment-by-Phone
Telephone Redemption
call 1-800-225-5291
For: TDD
call 1-800-554-6713
JHD-2300P 5-95 Printed on Recycled Paper
JOHN HANCOCK
TAX-EXEMPT
INCOME FUND
CLASS A AND CLASS B SHARES
PROSPECTUS
MAY 1, 1995
A MUTUAL FUND SEEKING AS HIGH A LEVEL OF
DIVIDEND INCOME EXEMPT FROM FEDERAL INCOME
TAX AS IS CONSISTENT WITH PRESERVATION OF
CAPITAL.
101 HUNTINGTON AVENUE
BOSTON, MASSACHUSETTS 02199-7603
TELEPHONE 1-800-225-5291
